Mises Wire

The Case for Free-Market Liberalism in Africa

Germinal G. Van — Wed, 13 Nov 2019 11:00:00 -0600

Perceived as a by-product imported from the West, liberalism — often known in the English-speaking world as “classical” liberalism — has been rejected as an ideological model to define the political culture and systems of the African continent. It was primarily rejected because liberalism, like its related economic system capitalism, is observed as the system of the oppressor, the European colonizer who seeks to maintain his domination upon the African people by sustaining his order. Second, it was rejected because most African political leaders argued that the emphasis that liberalism puts on the individual, is not compatible with African political culture due to the fact that the collective is valued over the individual. As a result, socio-politically, the majority of African governments were autocratic and oppressive, and the freedom of the citizens in each African country, was significantly restrained. Economically, the majority of African countries that embraced a more government-controlled economy, impoverished their people, and made their economy stagnant.

Liberalism was certainly born in Europe, and popularized in the seventeenth century through Second Treatise of Government of John Locke; but it is far from inherently being a western ideological by-product because the countries that have embraced liberalism — to various degrees — met with a commensurate amout of economic and political prosperity. One example of the success of liberalism outside of Europe and North America, is Japan; whereby politically, a Western-style rule-of-law has been integrated into the political system while economically, the living standard of the Japanese people is significantly higher due to a relatively high degree of economic freedom . Yet Japan is not a Western country nor a Western culture. If liberalism has been so beneficial to Japan, why can’t it work in Africa as well?

Private Property: The Secret to Economic Growth

Liberalism can have a serious positive impact in Africa if Africans embrace the concept of private property. As a matter of fact, economic freedom is the ability to retain private property. Private property is what determines the growth of capital. And that’s essential for a higher standard of living.

The African continent is exceedingly rich in natural resources, yet the living standard of Africans is very low. The most plausible explanation for this discrepancy is the lack of a system that protects private property.

Indeed, natural resources have no value unless human beings use their knowledge in combination with these resources to create value from. A resource is not a resource unless it is used to generate value. And the best way to create value through the utility of a scarce resource is to privately own that resource. The retention of private property generates capital, creates economic growth, stimulates economic incentives, and produces wealth. For example, South Africa is today the most prosperous country in Africa because compared to much of Africa, its people are economically and politically free. They have access to private property because the government plays a lesser role in economic activities. Rwanda is another great example of economic advancement in Africa. Rwanda retains an authoritarian political system, but it is relatively economically free. And economic freedom is, as Milton Friedman noted, an important first step to increasing political freedom as well.

Today, Rwanda has been ranked as one of the best countries in Africa to do business. Yet it has been only 25 years since the nation was swept up in a bloody genocide. If Rwanda has become one of the most economically advanced countries in Africa, it is because the rate of retention in private ownership has considerably increased since the end of the genocide. In fact, the rate of retention in private ownership increased from 10 percent in 1997 to 72 percent in 2019. It means that more people have had access to private property, and therefore, were able to create capital, and the creation of capital stimulated the Rwandan economy. The Republic of Kenya is another African nation that has a striking economic growth with more than 5 percent annual GDP growth in recent years. This would not be possible if Kenyans were denied the economic freedom necessary to acquire and build capital and wealth.

The Rule of Law: The Source of Political Stability

One of the most important conditions for an economic system that works is a reliable legal system that will protect economic freedom and civil liberties.

This is a key component of liberalism. If private property is not legally secure from both neighbors and the political system, it is not really secure. This is often referred to as “the rule of law.”

But the rule of law has often not prevailed in most Africa countries. In fact, most African countries, at the dawn of the independences, established a one-party state. These states could set rules and seize property arbitrarily without regard to established law.

The fundamental reason for establishing such a political system, was to avoid any kind of potential rebellion from the masses against the political authority. Consequently, the civil liberties of the African people were drastically restricted, and the rulers ruled their respective states autocratically, and sometimes oppressively.

As a result, the rule of law was substantially undermined, the political systems were unsurprisingly illiberal. For example, Zaire, under Mobutu, was ruled despotically with the enforcement of a one-party state that decided for everything on civil policy. The lack of the liberalization of political institutions and the absence of the rule of law, led to several coup d’états and political instability; notably the one in Liberia with Samuel Doe, overthrowing President William R. Tolbert in the early 1980s or in Togo with Gnassingbé Eyadema overthrowing Sylvanus Olympio in the mid-1960s.

The rule of law, however, is an essential factor that forms the foundation of economic prosperity and political stability. Without the rule of law, a society cannot adequately function economically nor politically. Unfortunately, the African political leaders of the post-colonial era have failed to develop the concept of the rule of law within African political culture and in African political systems.

A society cannot be economically advanced if it has no political stability, and political stability is rooted in the rule of law.

Liberalism, like capitalism, is not a western imported by-product as some Pan-Africanists may want to make it seem like. It is a by-product of human nature. Liberalism can be implemented in African political culture if the African people are willing to accept it, not as a “western by-product,” but as a social antidote to guarantee the improvement of their well-being politically and economically.

Mises Institute in Orlando

Wed, 13 Nov 2019 09:30:00 -0600

Why Friedman Is Wrong on the Business Cycle

Frank Shostak — Wed, 13 Nov 2019 09:30:00 -0600

According to an article in Bloomberg on November 5, 2019, Milton Friedman’s business cycle theory seems to be vindicated.

According to Milton Friedman, strong recoveries are just natural after particularly deep recessions. Like a guitar string, the harder the string is plucked down, the faster it should come back up.

Bigger recessions should lead to faster growth rates during the recoveries, to get the economy back to the pre-recession level of activity. In Friedman’s model, the size of the recession predicts the growth rate in the recovery.1

The Bloomberg article refers to a study by Tara Sinclair that employs advance mathematical techniques that supposedly confirmed Friedman’s hypothesis that in the US bigger recessions are followed by faster recoveries — but not the other way around. According to Bloomberg some other researchers found similar results for other countries.

On this way of thinking, views such as those presented by Ludwig von Mises that the magnitude of an economic bust is because of the magnitudes of the previous boom is false.

Contrary to Mises, a common view is the bust is caused by various mysterious factors that have nothing to do with the previous boom. But that the main problem with the Friedman’s model is the lack of a coherent definition of what a boom-bust cycle really is.

Defining Boom-Bust Cycles

In a free, unhampered market, we could envisage that the economy would be subject to various shocks, but it is difficult to envisage a phenomenon of recurrent boom-bust cycles. According to Rothbard,

Before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subjects; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions.

The boom-bust cycle phenomenon is somehow linked to the modern world. But what is the link? The source of the recurring boom-bust cycles turns out to be the alleged "protector" of the economy — the central bank itself. A loose central bank monetary policy, which results in an expansion of money out of “thin air” sets in motion an exchange of nothing for something, which amounts to a diversion of real wealth from wealth-generating activities to non-wealth-generating activities. In the process, this diversion weakens wealth generators, and this in turn weakens their ability to grow the overall pool of real wealth.

The expansion in activities that are based on loose monetary policy is what an economic "boom" (or false economic prosperity) is all about. Note that once the central bank's pace of monetary expansion strengthens the pace of the diversion of real wealth is also going to strengthen.

Once however, the central bank tightens its monetary stance, this slows down the diversion of real wealth from wealth producers to non-wealth producers. Activities that sprang up on the back of the previous loose monetary policy are now getting less support from the money supply; they fall into trouble — an economic bust or recession emerges.

Contrary to Friedman, it is not possible to have an economic bust without the emergence of the previous boom. Again the subject matter of boom-bust cycles are various activities that emerged on the back of central bank policies. These activities, which we label as bubble activities, are preceded by monetary policies of the central bank, which in turn tends to manifest itself by means of the yearly growth of money supply and the height of interest rates.

Loose monetary policies are likely to manifest in the strengthening of the annual growth of money supply and a decline in the policy interest rate. A tighter monetary stance is likely to manifest in the decline in the annual growth of money supply and in the increase in the policy interest rate.

Again, a loose monetary stance, and a subsequent increase in the momentum of money supply results in the increase in bubble activities whille a tighter stance leads to their demise.

On this way of thinking an increase in bubbles cannot emerge during a tighter monetary stance. On the contrary, a tighter stance will lead to a demise of the bubbles. Obviously then it does not make much sense as the Friedman’s business cycle model suggests that an economic boom is caused by the previous bust.

So how then we are to respond to various sophisticated empirical studies, which support Friedman’s theory?

To suggest that the boom-bust cycle can be depicted by a guitar string — the harder the string is plucked down, the faster it should come back — is not different from the hypothetical case where if a dog barks four times this preceded an economic recession and if a dog barks two times prosperity was followed suit. Note that the dog-barking example to explain boom-bust cycles is as ridiculous as the example of the guitar string. To explain a phenomenon one needs to identify the key factors that are responsible for this phenomenon. Obviously, a guitar string has nothing to do here with the emergence and the demise of bubble activities.

Hence, regardless of the mathematical sophistication if the underlying logic of the analysis is flawed then the outcome of the analysis must be rejected.

1. See Economic Inquiry, April 1993, 171-77

After Years of Decline, Competition in Banking Finally Grows Again

Josh Reini — Wed, 13 Nov 2019 06:00:00 -0600

US Banks are seeing a larger number of new entrants into the industry. Chime, a mobile-only bank, has opened two million online checking accounts and is adding more customers each month than Wells Fargo or Citibank. Firms from outside traditional consumer banking including Square, Goldman Sachs (Marcus), and Robinhood are entering the industry as well. The consulting firm CG42 said in a recent report on the vulnerability of retail banking that it expects the ten largest banks to lose $344 billion in deposits over the next year.

Applications for and approvals of FDIC deposit insurance are at a recent high, with fifteen approvals in 2018 and eight so far this year, shown in the chart below. Despite banking’s 20 year decline in the number of banks, the floodgates are seeming to be open for a new wave of digital-first banks to pursue new licenses. While the new banks may not outnumber the 1,500 banks that have closed since 2009 — their appeal to a new wave of consumers represents a substantial threat to the 0.2% of megabanks that hold more than two-thirds of industry assets .

Source: FDIC

Paving the Way for New Banks

As the demographic of the United States shifts younger, customers have started to move away from reliance on traditional brick and mortar branches and instead prefer app-based services with lower fees . This has led to an erosion of entrance and exit costs as the need to build buildings and pay tellers is eliminated. Additionally, venture capitalists are setting records with funding of “neo-banks,” investing $2.5 billion through the second quarter of 2019 — for reference, the previous high was only $2.3 Billion in all of 2018. Both the shift in preferences away from physical branches and the availability of funding have paved the way for new banks to enter the market.

A paper entitled Competition in Banking by Carol Ann Northcott published in 2004 lists the ways that banks differ to include reputation, product offerings, and the extensiveness and location of their branch networks. Scandals such as Wells Fargo’s “Eight is Great” phony account scandal and the Financial Crisis of 2008 have tarnished the reputation of big banks and, along with the disappearing significance of branches, removed the mystique of the incumbent banks.

Disappearing Tax Advantage for Incumbent Banks

Under Section 172 of the Internal Revenue Code, corporations are able to carry forward Net Operating Losses (NOLs) indefinitely, minimizing tax liability. In the chart below using data from the World Bank, before-tax (red line) and after-tax (blue dots) return on assets are diverging and the tax burden (purple, calculated as the difference between before and after-tax ROA) is growing since the Great Recession in 2008. Furthermore, in 2017 the Tax Cuts and Jobs Act (TJCA) put additional limitations on NOL deductions, serving to increase the tax liability for banks. With Net Operating Loss (NOL) tax exemptions rolling off for incumbent banks, their cost advantage is reduced — putting them on a more even playing field with new entrants. While the rules surrounding NOLs exist to provide protection from “excessive hardships from tax based upon an arbitrary annual accounting,” they can artificially prop up inefficient firms and stifle competition. As banks become profitable again following the Great Recession and lose their tax advantage over new banks, opportunity for new entrants grows.

Source: World Bank

Implications for Consumers

Banks contribute greatly to growth by facilitating production in other industries and promoting capital accumulation through the supply of credit. As competition for customers grows, banks are forced to often lower their profit margin or lose their market share to rival banks. In this situation, a larger quantity of credit will be supplied at the lower price. A paper by Besanko and Thakor examines loan and deposit markets and finds that loan rates decrease and deposit rates increase as more banks are added to the market. These findings support the theoretical prediction that a more competitive environment results in the larger quantity of credit is supplied at a lower price.

As more banks enter the market and capture market share, incumbent firms lose their power in the market. Shining the light on a potential pitfall of a more competitive market, Northcott finds that a banking system that exhibits some degree of market power may improve credit availability of certain firms and provide incentives for banks to screen loans which aids the efficient allocation of resources. In addition, she finds that market power may contribute to stability by providing incentives that mitigate risk-taking behavior and providing incentives to screen and monitor loans. Guzman also finds that the problems of the loan-borrower relationship may be exacerbated by more competitive market structures where information is not costlessly obtainable by the bank. Northcott finds no consensus in the literature on the optimal competitive structure, but it is clear that, for the moment, entry costs for retail banks are falling and competition is growing in the digital age.

Rick Rule: Deep Understanding of Markets Opens a Pathway to Entrepreneurial Leadership

Hunter Hastings — Tue, 12 Nov 2019 10:30:00 -0600

Rick Rule is CEO at Sprott US Holdings. His lifetime focus on natural resources finance enabled him to carve a unique pathway to entrepreneurial success. Like many entrepreneurial journeys, Rick’s had some twists and turns. Here are some of the key stages.

Key Takeaways and Actionable Insights

Find out early what you love. Rick enjoyed the outdoors, nature and therefore natural resources, the associated science of efficient and effective use of natural resources, and finance. All of us have a combination of likes and preferences that may stimulate us but may not initially appear to present us with an entrepreneurial recipe. But as Curt Carlson explained in Episode #34, combining knowledge from different people and fields can result in compounding insights.

Combine Knowledge in New Ways. Rick combined natural resource science with principles of corporate finance, specifically debt and equity finance for extractive industries. As a result of the special properties of natural resource markets, and firms’ needs for customized financing, an opportunity niche emerged. Rick’s application of his special combination of knowledge placed him in a competitively advantaged position.

Learn By (Hard) Experience. Rick learned not to confuse a bull market with brains, as he puts it. He did business through a complete commodity market cycle in the 1970s through the early 80s, experiencing volatility and ups and downs first hand. Theory is no substitute for experience. Nevertheless, his knowledge of Austrian Business Cycle Theory, Austrian Price Theory (“the cure for high prices is high prices, and the cure for low prices is low prices”) granted him a superior perspective in interpreting market signals.

Develop Deep Market and Customer Understanding. In his focus market, Rick developed a business segmentation that focused on participant firms of a defined size (<$250MM market cap). He studied those customers and understood their circumstances. The consequence of limited information flow (data about these firms did not flow easily between conventional market analysts), was that the firms had limited access to capital. Rick was able to overcome these information gaps, making him a preferred supplier of scarce finance.

Identify a Need You Can Fill For Your Carefully Selected Audience in Your Carefully Selected Market Segment. The business model came together in a way that Rick describes as “lender of last resort to high quality management teams in high quality companies that were not popular” and were therefore capital constrained. In addition, Rick’s understanding of business cycles and commodity prices further strengthened his confidence in lending when others would not, the market rewards for which turned out to be high.

Combine Empathy, Trust and Courage. Rick confirmed the E4E emphasis on empathy as an important skill for entrepreneurs — primarily, in his case, empathy for the customers whom he financed. He sought to combine empathy with trust: in a market where information is scarce, it is imperative to have trust in the sources. “Without trust,” says Rick, “I have no information, and therefore I cannot make decisions.” The third emotional attribute he identified is courage — the courage to have the conviction that your model indicating a future upcycle or price rise is well constructed, and not to second-guess it during the time that the trade is underwater.

Additional Resource

"Rick Rule's Path to Entrepreneurial Leadership" (PDF): Mises.org/E4E_39_PDF

A Deeply Flawed History of the Austrian School

David Gordon — Tue, 12 Nov 2019 10:30:00 -0600

The Marginal Revolutionaries: How Austrian Economics Fought the War of Ideas
by Janek Wasserman
Yale University Press, 2019
xiii+ 354 pages

Janek Wasserman, who teaches history at the University of Alabama, has written a useful but deeply flawed book. Useful, because Wasserman has brought to light substantial archival material on the background of the Austrian school, but deeply flawed on two counts. First, Wasserman is beyond his depth when he writes about theoretical issues. In particular, he does not understand Mises, but his lack of knowledge is apparent elsewhere as well. Second, he obtrudes his political opinions on readers in a way that must generate skepticism about his presentation of his archival research.

Wasserman distinguishes a number of stages in the history of the Austrian school. I do not propose to discuss these in detail but will mention only a few highlights. In general, Wasserman stresses the networks among the leading Austrians. They all knew each other and, though often at odds, they tended to support one another in times of crisis. Further, the cultural ferment of Vienna affected them: “The exchange of ironical barbs and clever repartee reflected the mode of the Austrian School specifically and modernist Vienna in general. The famed literary critic and cultural icon Karl Kraus best embodied this spirit. … Good polemics demanded satire and unfairness. It also was not enough to win one’s dispute with intellectual foes: one had to best adversaries in style. Schumpeter and Bőhm[-Bawerk] excelled in these arts and used the tools of the Gymnasium and coffeehouse to great effect.”

Schumpeter and Mises are often, and correctly, viewed as rivals who had little use for each other, but one of Wasserman’s most valuable insights is that they sometimes worked together. “Schumpeter encouraged Mises to speak out on Austrian monetary problems in the Austrian Political Society, where the two made common cause against the wartime government.”

Wasserman rightly notes that, despite his deviations from classic Austrian theory, Schumpeter’s Capitalism, Socialism, and Democracy is best read as a defense of capitalism: “While capitalism in its current, desiccated form seemed destined for collapse, this need not transpire. Deploying a satirist’s wit and an ironist’s pen, Capitalism revealed that Schumpeter believed just the opposite. Capitalism may sow seeds of its own destruction, but it still constituted the surest guarantee of prosperity and democracy. … Schumpeter also leveled a hearty criticism against his economist colleagues, whose static models of perfect competition and complete information, of partial and general equilibria, possessed little explanatory power for a dynamic world. … Capitalism, Socialism, and Democracy is one of the greatest and subtlest apologia for capitalism and elitist liberalism ever written.”

If Wasserman deserves praise for his treatment of Schumpeter, unfortunately this same is not true for his account of Mises. He adopts uncritically the perspective of Hayek, who varied in his estimation of Mises, and Gottfried Haberler about Nationalőkonomie: “Hayek conceded that the book showed a glaring ignorance of recent developments. … Hayek’s critique followed the lead of Haberler, who had argued for years that Mises was no longer a significant economist and that his work offered no insights for anyone who had learned economics since the Great War: ‘If one had studied the classics and Marshall in 1912, then one would have learned nothing from Mises.’” Had Wasserman consulted the book itself, he would have found that it includes references to Haberler’s then contemporary work on international trade theory and Hayek’s work, also then recent, on the business cycle and the socialist calculation argument. Matters become even clearer if one examines Human Action, the English expansion and revision of the German treatise. In it, Mises responds to Haberler’s criticism of Austrian business cycle theory and dissents from Hayek on the Ricardo effect.

Even more important, though, are Wasserman’s mistakes about praxeology. He says, “Mises’s most controversial assertion was his insistence on the a priori quality of the praxeological axiom. … This unremitting stance, which denied explanatory power to inductive reasoning or empirical observations, left many scholars cold. … Moreover, it did not seem that praxeology was supple enough to address contemporary problems.” Incredibly, Wasserman appears to attribute to Mises the odd view that every statement about economics can be deduced from the action axiom. Instead, of course, Mises developed praxeology as a deductive science that economists could use to help explain particular events. Doing so does not preclude empirical investigation but rather requires it.

An even worse misunderstanding is this: “Mises’s elevation of economics to the status of logic had great seductive power. If all of Mises’s economic assertions could be deduced from his core tenet — ‘Human action is purposeful behavior’ — then decisions that impeded the smooth functioning of human action violated scientific law and human will.” This does not follow at all, and only someone bereft of ability to reason logically could think it did. If all actions are purposeful, then actions that impede other actions are also purposeful.

Wasserman’s incompetence in theoretical issues is not confined to mistakes about Mises. He rightly says that The Theory of Games and Economic Behavior is difficult, but at one point he quotes a long sentence, which I shall not reproduce here, and says of it: “As a further example take one of von Neumann’s more straightforward explanations from early in the book, the elements of a game. … [Then follows proposition 6.2.1] Virtually no economists at the time were familiar with set notation or group theory, rendering this passage incomprehensible to its intended audience.” In fact, the proposition is easy to understand and requires no knowledge of group theory or set notation. It says no more than that a game consists of a fixed number of moves, where a “move” is a choice among given alternatives, and provides symbols for these points.

Here is another example of Wasserman’s ignorance, though here I am captious. He says, “Rőpke attracted the support of Hayek and the Italian éminense grise social scientist Benedetto Croce…”. To call Croce a “social scientist” is jarring. Croce was a leading light of Italian Idealist philosophy, as well as a historian and man of letters, not a social scientist.

Wasserman has strong political opinions and, as I have said earlier, he obtrudes these on readers in a way that arouses mistrust about his presentation of archival material. He says, “In this spat, the Austrians of the LvMI [Mises Institute] renewed their ongoing feud with the Kochs, GMU [George Mason University, and Cato]. The Misesians rejected the separation of economics and politics: Austrian economics implied libertarianism — of a conservative stripe. The GMU Austrians were consistently anti-interventionist and pro-market not just in their scholarship but in their politics, and many of them identified ideologically with libertarianism. They nevertheless believed that one could keep one’s scholarship and politics separate. Rejecting the ‘value-free’ pretensions of the left-leaning libertarians — and the longer wertfrei tradition of the Austrian School — the LvMI bloc reached out to other marginal right-wing groups, such as states’ rights organizations, historical revisionists, and neo-Confederates.”

Murray Rothbard did not reject value-freedom in economics. To the contrary, he insisted on it, and a principal theme in his writings about policy is that economists should make clear their value-commitments. In this he has been followed by Joseph Salerno, whom Wasserman assails. A grosser misunderstanding on Rothbard could hardly be imagined.

As Dante long ago said, “non ragioniam di lor.” Let us look at this ill-thought out book and pass on.

The FDA Wants to Control Your Stem Cells

A. Rahman Ford — Tue, 12 Nov 2019 06:00:00 -0600

There’s an escalating government assault on our stem cells and we should all be very concerned about it.

Most people probably associate stem cells with religious debates over embryos and fetuses. However, we all have stem cells inside of us that many contend can be extracted, processed and re-administered as as medical service. These are called autologous or “personal” stem cells. Current Food and Drug Administration (FDA) guidance, however, essentially classifies our stem cells as “drugs,” thus preventing us from freely using them as we wish.

The FDA magically turned our cells into “drugs” in 2006 by changing one word in 21 CFR 1271, the regulatory framework that governs stem cells. It was an act that occurred without public commentary and conferred an authority upon the FDA that Congress never intended it to have. In the Journal of Translational Medicine, Michael Freeman and Mitchell Fuerst referred to the word change as a “semantic sleight of hand.” In their 2012 paper, those same authors warned us that the FDA wasn’t done expanding its regulatory authority over our stem cells. Given recent FDA actions like its restrictive 2017 SCT guidance, the issuance of warning letters to clinics using autologous SCT and the litigation against SCT clinics, Freeman and Fuerst’s words ring eerily prophetic.

Indeed, at the urging of the House Energy and Commerce Committee, as well as others in the private sector, the FDA has recently increased its enforcement actions against clinics offering SCT. With the assistance of certain corporate media outlets, a distinct cadre of vocal SCT regulationists have methodically deployed disinformation campaigns, unsubstantiated invective and pejorative terms such as “rogue,” “unproven,” “wild west,” “unregulated” “illegitimate,” “dangerous” and “snake oil” in an effort transform to the term “stem cell clinic” into a scary slur.

The SCT regulationist assault comes principally from the FDA, whose regulations and guidance unduly restrict access to personal SCT and hurt more people than they purport to protect. In fact, the actual reported cases of harm from SCT are remarkably few, while many patients express satisfaction with treatment. Likewise, academic publications like Stem Cell Reports have joined the regulationist phalanx, publishing a pseudo-scientific study suggesting that online platforms such as YouTube should summarily suppress or eliminate content containing positive testimonials about SCT. Google has recently joined the authoritarian online censorship campaign against SCT. Similarly, the Canadian Medical Association Journal published a SCT fearmongering case report with unsubstantiated generalizations about the “dangers” of SCT. Bioethicists and scientists also play active roles in the regulationist cadre, arguing for SCT crowdfunding censorship by GoFundMe and baselessly asserting how unscrupulous, bad-actor stem cell clinicians use deceptive marketing practices to exploit desperate patients.

Even a recent Pew Charitable Trust report endorsed an increased FDA crackdown on autologous SCT, which is hypocritical given that its recommendations were clearly biased against SCT clinics and informed in part by a former Johnson & Johnson employee. That’s the same Johnson & Johnson that is currently embroiled in a maelstrom of controversy over its toxic, cancer-causing “baby” powder and that just reached a $20.4 million settlement in an opioid epidemic liability lawsuit.

The SCT regulationist campaign is effectively propelled by a paternalistic government-media-industry- academic quadplex that issues policy decrees with an insularity and condescension that regards patients as chattel, or a veritable medical untermensch. This results in a non-consensual usurpation of our own health autonomy, an infantilization of a crippled sub-stratum of Americans who are excluded from any serious discussion of SCT regulatory policy, and who are presumably too stupid to make their own medical decisions. This power asymmetry within the SCT policymaking dynamic is incongruent with the fundamental precepts of justice, inclusion and egalitarianism that undergird our American democracy.

And appurtenant to our democracy are certain fundamental civil rights, one of which is the right to privacy. Arguably, there is some legally cognizable privacy interest in cells that are extracted from us with the intention of being infused back into us. Our right to privacy is premised upon the idea of personal autonomy and extends to the right to bodily integrity. In Union Pacific Railway Co. v Botsford (1891) the U.S. Supreme Court opined that “no right is held more sacred of carefully guarded … than the right of every individual to the possession and control of his own person, free from all restraint of interference from others, unless by clear and unquestionable authority of law.” The FDA and the SCT regulationists would do well to recognize this right.

Two Parties, Should We Care?

Ron Paul — Mon, 11 Nov 2019 17:15:00 -0600

Includes an introduction by Lew Rockwell. Recorded on November 9, 2019, in Lake Jackson, Texas.

Ron Paul, Hero

Llewellyn H. Rockwell Jr. — Mon, 11 Nov 2019 17:00:00 -0600

Includes an introduction by Jeff Deist. Recorded on November 9, 2019, in Lake Jackson, Texas.

How Not to be a CIA Propagandist

Daniel McAdams — Mon, 11 Nov 2019 16:45:00 -0600

Recorded on November 9, 2019, in Lake Jackson, Texas.

How "Meaningless Words" Create the Narrative

Jeff Deist — Mon, 11 Nov 2019 16:45:00 -0600

Recorded on November 9, 2019, in Lake Jackson, Texas.

Propaganda and the 2020 Foreign Policy Debate

Scott Horton — Mon, 11 Nov 2019 16:30:00 -0600

Recorded on November 9, 2019, in Lake Jackson, Texas.

Welcome to the 2019 Ron Paul Symposium

Jeff Deist — Mon, 11 Nov 2019 16:15:00 -0600

Includes an introduction by David Gornoski. Recorded on November 9, 2019, in Lake Jackson, Texas.

19th-Century Americans Didn't "Support the Troops"

Ryan McMaken — Mon, 11 Nov 2019 15:00:00 -0600

Were an American from the mid-nineteenth century to time-travel to modern America, he'd be truly amazed to find that Americans are often expected to thank soldiers "for your service" and to act as if the military was doing the taxpayer a favor.

The lionizing of government employees in uniform has become standard fare in the post-9-11 world, with special discounts for members of the military, early boarding on airplanes, and free meals at restaurants.

It's quite a contrast from the attitude of Americans during the first century of the republic, however.

Of this, the examples are numerous.

For example, in his memoirs, Ulysses S. Grant recounts how he trotted out into the streets of Cincinnati after first receiving his uniform as an officer. According to Grant:

I donned [the uniform] and set off for Cincinnati on horseback. While I was ... imagining that everyone was looking at me ... a little urchin, bareheaded, barefooted with a dirty and ragged pants ... turned to me and said "Soldier! will you work? No sir-ee: I'll sell my shirt first."1

This attitude, Richard Bruce Winders explains in his history of James A. Polk, "illustrates the image of soldiers, common in the 1840s, as slackers on the public dole."2 Indeed, even as late at 1891, a speech published in the Christian journal The Churman recounted Grant's anecdote and concluded "the national contempt" for the army was based on the fact "it is 'such a lazy life.'"3

Nor did such attitudes begin in the 1840s. In his biography of George Washington, Mason Locke Weems notes the lack of concern over American casualties suffered under Anthony Wayne in a battle with the Shawnee in 1794:

However, after the first shock, the loss of these poor souls was not much lamented. Tall young fellows, who could easily get their half dollar a day at the healthful and glorious labor of the plough, to go and enlist and rust among the lice and itch of a camp, for four dollars a month, were certainly not worth their country's crying about. [Emphasis in the original.]4

The Militia vs. The Federal Military

This general contempt for soldiering wasn't applied to all soldiers. In nineteenth century America, it was considered honorable to be a militia man — a part-time soldier tasked with protecting one's community from raiding Indians and gangs and thugs. It was something else entirely, however, to be a professional, full-time soldier. Those people, it was commonly felt, were indeed what we today would call "welfare queens" living off the hard work of American taxpayers. In other words, for Americans of the time, it was laudable to take up arms in defense of one's community. But one was also expected to get a real job.

[RELATED: "Why We Can't Ignore the 'Militia' Clause of the Second Amendment" by Ryan McMaken.]

Put another way, the militias were one thing. The "standing army" was something else entirely.

This isn't surprising given the general disdain for standing armies in early America. The fear and contempt for standing armies was the primary motivation for the Second Amendment — an amendment designed to encourage and protect local militias and the ownership of firearms outside of federal control. According to historian Marcus Cunliffe, this attitude goes back to the days of American resentment over British regulars being quartered and fed using the using the housing and food of American civilians. In many cases, Americans begrudgingly tolerated the imposition, but after the Revolution, this attitude toward professional soldiers was simply transferred from British troops to American federal troops.5

Indeed, even members of the military were aware of their semi-pariah status.In a speech to military cadets, officer Benjamin Butler concluded in 1849 that, "large standing armies" are "productive of needless expenditure; injurious to the habits and morals of the people." Even within military families full off federal officers, one brother might advise another in 1845 that "I by no means desire that my sons should ever wear a sword. I would certainly prefer that they should become honest, industrious mechanics."6

This would echo a common sentiment of the period that even for those who did spend some time as a professional soldier, it was best to use "every kind of negative and positive inducement" to encourage a soldier "to turn himself back into a civilian before it was too late."7

In practice, of course, few Americans ever had to deal in person with any of these federal officers they so disdained. As Cunliffe notes,

Americans in many areas had no idea what a regular officer looked like. Regular soldiers existed for them only as caricatures — the enlisted men as drunkards and "mercenaries," the officers as haughty "aristocrats."8

Decades later, the rarity of federal officers remained a point of pride for critics of the standing army up until the First World War. In a 1914 semi-humorous editorial in Collier's magazine titled "Why We Cannot Have a Standing Army," George Fitch is grateful the United States is not like the Old World where "working people of Europe must" support millions of soldiers "in idleness." In America, Fitch happily reminds his readers , "millions of people live and die without seeing a member of the regular Army."

When forced to deal with a standing army, however, Fitch suggests the soldiers be equipped with rickshaws and "plac[ed] at the service of the public" so that the taxpayers might go "joyriding" and thus more easily endure the burden imposed by the "armed hordes."9

Such rhetoric in the mid-nineteenth century would have been extremely commonplace. But in the decades following the Civil War, the sheer number of military veterans — combined with the fact their state militia units had been mostly federalized in the conflict — meant soldiers more commonly came to be regarded as objects of reverence rather than suspicion. It was just one of the ways the United States became "federalized" after the Civil War. Military service became less about service to one's particular community, and more about national service. This change was helped along by federal legislation which blurred — and eventually all but abolished — the line between state militias and the federal military. Today, the militias have been transformed into the National Guard and made de facto permanent instruments of federal military policy. The distinction between the "citizen soldier" and the professional hireling been almost totally erased, and there is no longer any cultural mandate to suspect federal troops of wasting the taxpayers' hard-earned cash. Indeed, the taxpayers are often now expected to thank the soldiers for doing a service the taxpayer already pays handsomely for.

Our nineteenth century time traveler would find this state of affairs to be very odd indeed.

1. Corson, O.T., "Birth Boyhood and Education of General Grant." The Ohio Educational Monthly, Volume 71. p 9.
2. Richard Bruce Winders. Mr. Polk's Army: The American Military Experience in the Mexican War. Texas A&M University Press. 2000. p. 51
3. Address by Rev. William Langford. The Churchman, November 14, 1891. p 637. (Volume 64.)
4. Weems, M.L., The life of George Washington : with curious anecdotes, equally honourable to himself and exemplary to his young countrymen. Lippincott. Philadelphia. 1800. p 151.(https://archive.org/details/lifeofgeorgewashweem/page/n6)
5. Cunliffe, Marcus. Civilians and Soldiers: The Martial Spirit in America 1775-1865. Little, Brown and Com. Boston. 1968.
6. Ibid. p 130.
7. Ibid. p 129.
8. Ibid. p 103.
9. Collier's, Volume 52., March 14, 1914., p 9.

The Decline of the Rule of Law

Friedrich A. Hayek — Mon, 11 Nov 2019 14:00:00 -0600

Political wisdom, dearly bought by the bitter experience of generations, is often lost through the gradual change in the meaning of the words which express its maxims. Though the phrases themselves may continue to receive lip service, they are slowly denuded of their original significance until they are dropped as empty and commonplace. Finally, an ideal for which people have passionately fought in the past falls into oblivion because it lacks a generally understood name. If the history of political concepts is in general of interest only to the specialist, in such situations there is often no other way of discovering what is happening in our time than to go back to the source in order to recover the original meaning of the debased verbal coin which we still use. Today this is certainly true of the conception of the Rule of Law which stood for the Englishman's ideal of liberty, but which seems now to have lost both its meaning and its appeal.

There can be little doubt about the source from which the Englishmen of the late Tudor and early Stuart period derived their new political ideal for which their sons fought in the 17th century; it was the rediscovery of the political philosophy of ancient Greece and Rome which, as Thomas Hobbes complained, inspired the new enthusiasm for liberty. Yet if we ask precisely what were the features in the teaching of the ancients which had that great appeal, the answer of modern scholarship is none too clear. We need not take seriously the fashionable allegation that personal freedom did not exist in ancient Athens: whatever may have been true of the degenerate democracy against which Plato reacted, it certainly was not true of those Athenians whom, at the moment of supreme danger during the Sicilian expedition, their general reminded above all that they were fighting for a country in which they had "unfettered discretion to live as they pleased." But wherein did this freedom of the "freest of the free countries," as Nicias called it on the same occasion, appear to consist – both to the Greeks themselves and to the Elizabethans whose imagination it fired?

I suggest the answer lies in part in a Greek word which the Elizabethans borrowed from the Greeks but which has since gone into disuse; its history, both in ancient Greece and later, provides a curious lesson. Isonomia, which appears in 1598 in John Florio's World of Wordes as an Italian word meaning "equalitie of lawes to all manner of persons," two years later, in its Englished form "isonomy," is already freely used by Philemon Holland in his translation of Livy to render the description of a state of equal laws for all and of responsibility of the magistrates. It continued to be used frequently throughout the 17th century, and "equality before the law," "government of law," and "rule of law," all seem to be later renderings of the concept earlier described by the Greek term.

Equal Laws for All

The history of the word in ancient Greek is itself instructive. It was a very old term which had preceded demokratia as the name of a political ideal. To Herodotus it was "the most beautiful of all names" for a political order. The demand for equal laws for all which it expressed was originally aimed against tyranny, but later came to he accepted as a general principle from which the demand for democracy was derived. After democracy had been achieved, the term continued to be used as a justification and 'later, as one scholar suggests, perhaps as a disguise of the true character of democracy: because democratic government soon proceeded to destroy that very equality before the law from which it derived its justification. The Greeks fully understood that the two concepts, although related, did not mean the same thing. Thucydides speaks without hesitation of an "isonomic oligarchy," and later we find isonomia used by Plato quite deliberately in contrast to, rather than in vindication of, democracy.

In the light of this development the celebrated passages in Aristotle's Politics in which he discusses the different kinds of democracy, even though he no longer uses the term isonomia, read like a defense of this old ideal. Readers will probably remember how he stresses that "it is more proper that law should govern than anyone of the citizens," that the persons holding supreme power "should be appointed only guardians and servants of the law," and particularly how he condemns the kind of government under which "the people govern and not the law." Such a government, according to him, cannot be regarded as a free state: "for when the government is not in the laws, then there is no free state, for the law ought to be supreme over all things"; he even contends that "any such establishment which centers all power in the votes of the people can not, properly speaking, be called a democracy, for their decrees can not be general in their extent." Together with the equally famous passage in the Rhetorics, in which he argues that "it is of great moment that well-drawn laws should themselves define all the points they can and leave as few as may be for the decision of the judges," this provides a fairly coherent doctrine of government by law.

How much all this meant to the Athenians is shown by the account given by Demosthenes of a law introduced by an Athenian under which "it should not be lawful to propose a law affecting any one individual, unless the same applied to all Athenians," because he was of the opinion that, "as every citizen has an equal share in civil rights, so everybody should have an equal share in the laws." Although, like Aristotle, Demosthenes no longer uses the term isonomia, the statement is little more than a paraphrase of the old concept.

17th-Century Rediscovery

A characteristic dispute between Hobbes and Harrington, from which, I believe, the modern use of the "government by laws and not by men" derives, indicates how alive these views of the ancient philosophers were to the political thinkers of the 17th century. Hobbes had described it as "just another error of Aristotle's politics that in a well-ordered commonwealth not men should govern but the law." Harrington countered that the "art whereby a civil society is instituted and preserved upon the foundation of common right or interest" is "to follow Aristotle and Livy … the empire of laws, not of men."

To the 17th-century Englishmen, it seems, the Latin authors, particularly Livy, Cicero, and Tacitus, became increasingly the more important sources of political philosophy. But, even if they did not go to Holland's translation of Livy where they would have found the word, it was still the Greek ideal of isonomia which they met at all the crucial points. Cicero's Omnes legum servi sumus ut liberi esse possumus [we are all servants of the laws in order that we may be free] (repeated later, almost word for word, by Voltaire, Montesquieu, and Kant) is perhaps the most concise expression of the ideal of freedom under the law. During the classical period of the Roman Law, it was once more understood that there was no real conflict between freedom and the law, their generality, certainty, and the restrictions they placed on the discretion of the authority, which was the essential condition of freedom. This condition lasted until the strict law (ius strictum) was progressively abandoned in the interest of a new social policy. As a distinguished student of Roman Law, F. Pringsheim, has described this process 'which started under the Emperor Constantine:

The absolute empire proclaimed together with the principle of equity the authority of the imperial will unfettered by the barrier of law. Justinian with his learned professors brought this process to its conclusion.

Struggle for Economic Freedom

When it comes to show what the Englishmen of the seventeenth and eighteenth centuries made of the classical tradition they had rediscovered, any brief account must inevitably consist mainly of quotations. But many of the most telling and instructive expressions of the central doctrine as it developed are less well known than they deserve. Nor is it generally remembered today that the decisive struggle between King and Parliament which led to the recognition and elaboration of the Rule of Law was fought mainly over the kind of economic issues which are again the center of controversy today. To the 19th-century historians the measures of James I and Charles I which produced the conflict seemed antiquated abuses without topical interest. Today, some of these disputes have an extraordinarily familiar ring. (In 1628 Charles I refrained from nationalizing coal only when it was pointed out to him that it might cause a rebellion!)

Throughout the period it was the demand for equal laws for all citizens by which Parliament opposed the King's efforts to regulate economic life. Men then seem to have understood better than they do today that the control of production always means the creation of privilege, of giving permission to Peter to do what Paul is not allowed to do. The first great statement of the principle of the Rule of Law, of certain and equal laws for all and of the limitation of administrative discretion, is contained in the Petition of Grievances of 1610; it was caused by new regulations for building in London and the prohibition of the making of starch from wheat which the King had made. On this occasion the House of Commons pleaded:

Among many other points of happiness and freedom which Your Majesty's subjects of this kingdom have enjoyed under your royal progenitors, Kings and Queens of this realm, there is none which they have accounted more dear and precious than this, to be guided and governed by the certain rule of law, which giveth both to the head and the members that which of right belongeth to them, and not by any uncertain and arbitrary form of government…. Out of this root hath grown the indisputable right of the people of this kingdom, not to be subject to any punishment that shall extend their lives, lands, bodies, or goods, other than such as are ordained by the common law of this land, or the statutes made by their common consent in Parliament.

The further development of what contemporary Socialist lawyers have contemptuously dismissed as the Whig doctrine of the Rule of Law was closely connected with the fight against government-conferred monopoly and particularly with the discussion around the Statute of Monopolies of 1624. It was mainly in this connection that that great source of Whig doctrine, Sir Edward Coke, developed his interpretation of Magna Carta which led him to declare (in his second Institutes):

If a grant be made to any man, to have the sole making of cards or the sole dealing with any other trade, that grant is against the liberty and freedom of the subject … and consequently against this great charter.

We have already noticed the characteristic positions taken on the critical point of executive discretion by Hobbes and Harrington respectively. We are not interested here in tracing the further steps in the development of the doctrine and shall pass over even its classical exposition by John Locke, except for the rarely noticed modern justification which he gives it. Its aim is to him what contemporary writers have called the "taming of power":

Laws made and rules set … to limit the power and moderate the dominion of every part and member of society.

The form in which the doctrine became the common property of an Englishmen was determined, however, as is probably always true in such cases, more by the historians who presented the achievements of the revolution to later generations than by the writings of the political theorists. Thus, if we want to know what the tradition in question meant to the Englishman of the late eighteenth or early 19th century, we can hardly do better than turn to David Hume's History of England which indeed is to a large extent an interpretation of political progress from "government of will" to "government of law." There is particularly one passage, referring to the abolition of the Star Chamber in 1641, which shows what he regarded as the chief significance of the constitutional developments of the 17th century:

No government, at that time, appeared in the world, nor is perhaps found in the records of any history, which subsisted without a mixture of some arbitrary authority, committed to some magistrate; and it might reasonably, beforehand, appear doubtful whether human society could ever arrive at that state of perfection, as to support itself with no other control, than the general and rigid maxims of law and equity. But the Parliament justly thought that the King was too eminent a magistrate to be trusted with discretionary power, which he might so easily turn to the destruction of liberty. And in the event it has been found that, though some inconveniencies arise from the maxim of adhering strictly to law, yet ,the advantages so much overbalance them, as should render the English forever grateful to the memory of their ancestors who, after repeated contests, at last established that noble principle.

Later, of course, this Whig doctrine found its classic expression in many familiar passages of Edmund Burke. But if we want a more precise statement of its content we have to turn to some of his lesser contemporaries. A characteristic statement which has been attributed to Sir Philip Francis (but which probably occurs in the Junius letters) is the following:

The government of England is a government of law. We betray ourselves, we contradict the spirit of our laws, and we shake the whole system of English jurisprudence, whenever we entrust a discretionary power over the life, liberty, or fortune of the subject to any man, or set of men, whatsoever, on the presumption that it will not be abused.

The fullest account of the rationale of the whole doctrine which I know occurs, however, in the chapter "Of the Administration of Justice" in Archdeacon Paley's Principles of Moral and Political Philosophy:

The first maxim of a free state is, that the laws be made by one set of men, and administered by another; in other words, that the legislative and the judicial character be kept separate. When these offices are united in the same person or assembly, particular laws are made for particular cases, springing oftentimes from partial motives, and directed to private ends: whilst they are kept separate, general laws are made by one body of men, without forseeing whom they will affect; and, when made, must be applied by the other, let them affect whom they will….

Parliament knows not the individuals upon whom its acts will operate: it has no case or parties before it: no private designs to serve: consequently, its resolutions will be suggested by the consideration of universal effects and tendencies, which always produce impartial and commonly advantageous regulations.

Here, I suggest, we have nearly all the elements which together produce the complex doctrine which the 19th century took for granted under the name of the Rule of Law. The main point is that, in the use of its coercive powers, the discretion of the authorities should be so strictly bound by laws laid down beforehand that the individual can foresee with fair certainty how these powers will be used in particular instances; and that the laws themselves are truly general and create no privileges for class or person because they are made in view of their long-run effects and therefore in necessary ignorance of who will be the particular individuals who will be benefited or harmed by them. That the law should be an instrument to be used by the individuals for their ends and not an instrument used upon the people by the legislators is the ultimate meaning of the Rule of Law.

Since this Rule of Law is a rule for the legislator, a rule about what the law ought to be, it can, of course, never be a rule of the positive law of any land. The legislator can never effectively limit his own powers. The rule is rather a meta-legal principle which can operate only through its action on public opinion. So long as it is generally believed in, it will keep legislation within the bounds of the Rule of Law. Once it ceases to be accepted or understood by public opinion, soon the law itself will be in conflict with the Rule of Law.

As the establishment of the Rule of Law in England was the outcome of the slow growth of public opinion, the result was neither systematic nor consistent. The theorizing about it was mainly left to foreigners who, in explaining English institutions to their compatriots, had to try to make explicit and to give the appearance of order to a set of seemingly irrational traditions which yet mysteriously secured to the Englishman a degree of liberty scarcely known on the Continent.

These efforts to embody into a definite program for reform what had been the result of historical growth at the same time could not but show that the English development had remained curiously incomplete. That English law should never have drawn such obvious conclusions from the general principle as formally to recognize the principle nulla poena sine lege, or to give to the citizen an effective remedy against wrongs done him by the state (as distinguished from its individual agents),or that English constitutional development should not have led to the provision of any built-in safeguards against the infringement of the Rule of Law by routine legislation, seemed curious anomalies to the Continental lawyers who wished to imitate the British model.

The demand for the establishment of the Rule of Law in the Continental countries also became to some extent the conscious aim of a political movement, which had never been the case in England. Indeed, for a time in France and for a somewhat longer period in Germany, this demand was the very heart of the liberal program. In France it reached its height during the July monarchy when Louis Philippe himself proclaimed it as a basic principle of his reign: "Liberty consists only in the rule of laws." But neither the reign of Napoleon III nor the Third Republic provided a favorable atmosphere for the further growth of this tradition. And although France made some important contributions in adapting the English principle to a very different governmental structure, it was in Germany that the theoretical development was carried furthest. In the end it was the German conception of the Rechtsstaat which not only guided the liberal movements on the Continent but became characteristic of the European governmental systems as they existed until 1914.

This continental development is very instructive because there the efforts to establish the Rule of Law met from the very beginning conditions which arose in England only much later – the existence of a highly developed central administrative apparatus. This had grown up unfettered by the restrictions which the Rule of Law places on the discretionary use of coercion. Since these countries were not willing to dispense with its machinery, it was clear that the main problem was how to subject the administrative power to judicial control. It is a matter of comparative detail that in fact separate administrative courts were created to enforce the elaborate system evolved to restrain the administrative agencies. The main point is that the relations between these agencies and the citizen were systematically subjected to legal rules ultimately to be applied by a court of law. The German lawyers indeed, and with justice, regarded the creation of administrative courts as the crowning achievement of their efforts toward the Rechtsstaat. There could hardly have been a more grotesque and more harmful misjudgment of the Continental position by an eminent lawyer than A. V. Dicey's well-known contention that the existence of a distinct administrative law was in conflict with the Rule of Law.

Limits to Coercion

The real flaw of the Continental system, which English observers sensed but did not understand, lay elsewhere. The great misfortune was that the completion of the Continental development turned on a point which to the general public inevitably appeared merely a minor legal technicality. To guide all administrative coercion by rigid rules of law was a task which could have been solved only after long experience. If the existing administrative agencies were to continue their functions, it was evidently necessary to allow them for a time certain limited spheres within which they could employ their coercive powers according to their discretion. With respect to this field the administrative courts were therefore given power to decide, not whether the action taken by an administrative agency was such as was prescribed by the law, but merely whether it had acted within the limits of its discretion. This provision proved to be the loophole through which, in Germany and France, the modern administrative state could grow up and progressively undermine the principle of the Rechtsstaat.

It cannot be maintained that this was an inevitable development. If the Rule of Law had been strictly observed, this might well have caused what David Hume had called "some inconveniences," and might even substantially have delayed some desirable developments. Although the authorities must undoubtedly be given some discretion for such decisions as to destroy an owner's cattle in order to stop the spreading of a contagious disease, to tear down houses to prevent the spreading of tire, or to enforce safety regulations for buildings, this need not be a discretion exempt from judicial review. The judge may want expert opinion to decide whether the particular measures were necessary or reasonable. There ought to be the further safeguard that the owners affected by such decision are entitled to full compensation for the sacrifice they are required to make in the interest of the community.

The important point is that the decision is derived from a general rule and not from particular preferences which the policy of the government follows at the moment. The machinery of government, so far as it uses coercion, still serves general and timeless purposes, not particular ends. It makes no distinction between particular people. The discretion conferred is a limited discretion in the sense that the agent is to carry out the sense of a general rule. That this rule cannot be made wholly explicit or precise is the result of human imperfection. That it is in principle, however, still a matter of applying a general rule is shown by the fact that an independent and impartial judge, who in no way represents the policy of the government of the day will be able to decide whether the action was or was not in accordance with the law.

No Permanent Achievement

The suspicion with which Dicey and other English and American lawyers viewed the Continental position was thus not unjustified, even though they had misunderstood the causes of the state of affairs which existed there. It was not the existence of an administrative law and of administrative courts which was in conflict with the Rule of Law, but the fact that the principle underlying these institutions had not been carried through to its conclusion. Even at the time when, in the later part of the last century, the ideal of the Rechtsstaat had gained its greatest influence, the more deliberate efforts made on the Continent had not really succeeded in putting it into actual practice as fully as had been the case in England. There still remained there, as an American observer (A. B. Lowell) then described it, much of the kind of power which "most Anglo-Saxons feel … is in its nature arbitrary land ought not to be extended further than is absolutely necessary." And before the principle of the Rechtsstaat was completely realized and the remnants of the police state finally driven out, that old form of government began to reassert itself under the new name of Welfare State.

At the beginning of our century, the establishment of the Rule of Law appeared to most people one of the permanent achievements of Western civilization. Yet the process by which this tradition has been slowly undermined and eventually destroyed had even then been underway for nearly a generation. And today it is doubtful whether there is anywhere in Europe a man who can still boast that he need merely keep within the law to be wholly independent, in earning his livelihood, from the discretionary powers of arbitrary authority.

Socialist Inroads

The attack on the principles of the Rule of Law was part of the general movement away from liberalism which began about 1870. It came almost entirely from the intellectual leaders of the socialist movement. They directed their criticism against practically everyone of the principles which together make up the Rule of Law. But initially it was aimed mainly against the ideal of equality before the law. The socialists understood that if the state was to correct the unequal results which in a free society different gifts and different luck would bring to different people, these had to be treated unequally. As one of the most eminent legal theorists of Continental socialism, Anton Menger, explained in his Civil Law and the Propertyless Classes (1890):

By treating perfectly equally all citizens, without regard to their personal qualities and economic positions, and admitting unlimited competition between them, it was brought about that the production of goods was increased without limit, but also the poor and weak had only a small share in that increased output. The new economic and social legislation attempts therefore to protect the weak against the strong and to secure for them a moderate share in the good things of life. We know today that there is no greater injustice than to treat as equal what is in fact unequal.

A few years later, Anatole France was to give wide circulation to the similar ideas of his French socialist friends in the much quoted gibe about "the majestic equality of the laws, which forbids the rich as well as the poor to sleep under bridges, to beg in the streets, to steal bread." Little did the countless well-meaning persons who have since repeated this phrase realize that they were giving currency to one of the cleverest attacks on the fundamental principles of liberal society.

The systematic campaign which during the last sixty years has been conducted against all the constituent parts of the tradition of the Rule of Law mostly took the form of alleging that the particular principle in question had never really been in force, that it was impossible or impracticable to achieve it, that it had no definite meaning, and, in the end, that it was not even desirable. It may well be true, of course, that none of these ideals can ever be completely realized. But, if it is generally held that the law ought to be certain, that legislation and jurisdiction ought to be separate functions, that the exercise of discretion in the use of coercive powers should be strictly limited and always subject to judicial control, etc., these ideals will be achieved to a high degree. Once they are represented as illusions and people cease to strive for their realization, their practical influence is bound to vanish rapidly. And this is precisely what has happened.

The attacks against those features of the Rule of Law were directly determined by the recognition that to observe them would prevent an effective control of economic life by the state. The economic planning which was to be the socialist means to economic justice would be impossible unless the state was able to direct people and their possessions to whatever task the exigencies of the moment seemed to require. This, of course, is the very opposite of the Rule of Law.

Concept of Justice Abandoned

At the same time, another and perhaps even more fundamental process helped to speed up that development. Jurisprudence abandoned all concern with those metalegal criteria by which the justice of a given law can alone be determined. For legal positivism the concrete will of the majority on a particular issue became the only criterion of justice applicable in a democracy. On this basis it became impossible even to argue about – or to persuade anybody of – the justice or injustice of a law. To the lawyer who regards himself as a mere technician intent upon implementing the popular will, there can be no problem beyond what is in fact the law. To him the question whether a law conforms to general principles of justice is simply meaningless. The concept of the Rechtsstaat, which originally had implied certain requirements about the character of the laws, thus came to mean no more than that everything the government did must be authorized by a law – even if only in the sense that the law said that the government could do as it pleased.

Years before Hitler came to power German legal scholars had pointed out that this complete emptying of the concept of the Rechtsstaat had reached a point where what remained no longer formed an obstacle to the creation of a totalitarian regime. Today it is widely recognized in Germany that this is exactly where that development led.

But if there is now a healthy reaction under way in German legal thinking, the state of British discussion on this crucial problem seems to be very much where it was in pre-Hitler Germany. The Rule of Law is generally represented as either meaningless or requiring no more than legality of all government action. According to Sir Ivor Jennings, the Rule of Law in its original sense, "is a rule of action for Whigs and may be ignored by others." In its modern sense, he believes, it "is either common to all nations or does not exist." In Professor W. A. Robson's opinion it is possible to "distinguish 'policy' from 'law' only in theory" and "it is a misuse of language to say that an issue is 'nonjusticiable' merely because the adjudicating authority is free to determine the matter by the light of an unfettered discretion; and equally incorrect to say that an issue is 'justiciable' when there happens to be a clear rule of law available to be applied to it." Professor W. Friedmann informs us that in Britain "the Rule of Law is whatever Parliament, as the supreme lawgiver, makes it" and that therefore, "the incompatibility of planning with the Rule of Law is a myth sustainable only by prejudice or ignorance." Yet another member of the same group even went so far as to assert that the Rule of Law would still be in operation if the majority voted a dictator, say Hitler, into power: "the majority might be unwise, and it might be wicked, but the Rule of Law would prevail. For in a democracy right is what the majority make it to be."

In one of the most recent treatises on English jurisprudence it is contended that in the sense in which the Rule of Law has been represented in the present discussion, it "would strictly require the reversal of legislative measures which all democratic legislatures have found essential in the last half century." That may well be. But would those legislatures have regarded it as essential to pass those measures in this particular form if they had understood that it meant the destruction of what for centuries, at home and abroad, had been regarded as the essence of British liberty? Was it really essential for social improvement that law after law should have given ministers powers for "prescribing what under this Act has to be prescribed"? About one thing there can be no doubt: this is essential to the progress of socialism.

[This article was originally published in The Freeman: April 20, 1953 (part I), May 4, 1953 (part II).]

My First Time to East Berlin

James Bovard — Mon, 11 Nov 2019 10:00:00 -0600

This is the 30^th anniversary of the fall of the Berlin Wall — one of the most glorious moments in the modern history of freedom. I first passed through that wall while hitchhiking around Europe in the summer of 1977.

After camping in West German woods within mortar range of the Iron Curtain, I headed out at sunrise to catch a ride into East Germany. A quick hitch with an affable French businessman put me on the Autobahn and into West Berlin before noon. Rambling around the city, I met a young Dutch lesbian who was also surveying the scene. Hendrika slightly resembled a wheel of Gouda cheese but she had bright cheeks and mischievous eyes. She and I were both planning to visit East Berlin, and we figured there would be safety in numbers in enemy territory.

We caught up the next morning and passed through Checkpoint Charlie into the Soviet Bloc’s premier “showplace of communism.” Traveling from West Berlin to East Berlin was like passing into the mirror image of Disneyland. Instead of ticket takers at the entrance of rides, there were undercover cops enticing visitors to exchange currency on the black market — after which they would be fined or jailed. The police were backstopped by civilian informers lurking everywhere, waiting to get paid for tidbits or smears. Hendrika’s fluent German helped keep us from being arrested as we traversed semi-forbidden parts of the city.

On AlexanderPlatz, near the city center, we saw elite East German soldiers goosestepping down the street. West Germany banned the goosestep after the Third Reich was destroyed. But that particular march naturally appealed to the Stalinist regime that the Russians imposed on East Germans after World War II. The goosestep perfectly captures the relation of the State to the people: anyone who did not submit would be crushed. As George Orwell wrote, “The goose-step is one of the most horrible sights in the world, far more terrifying than a dive-bomber. It is simply an affirmation of naked power.”

Walking through East Berlin, I saw many bullet holes in apartment buildings and other structures. I didn’t know whether the damage remained from street battles between fascists and communists in the late 1920s and early 1930s, or from the Red Army’s bloody conquest of the city in 1945, or from the Soviet’s brutal repression of a popular uprising in 1953. Perhaps the bullet holes were left to remind people of the futility of resistance. On the other hand, almost everything looked gray and shabby, so it may have been simply on a long list of blemishes that never got fixed.

Almost all the people I saw on East Berlin streets looked utterly browbeaten. I noted in my journal: “Perhaps despotism drains the soul. It would be difficult to have a high opinion of one’s powers if one was constantly being coerced and subjected to others’ wills.” The East German regime insisted that the Berlin Wall was to keep fascists out from their workers’ paradise. I wasn’t aware of the East German government taking any polls to determine how many of their subjects swallowed that hokum. Regardless, that regime felt entitled to inflict endless delusions on people in order to secure the victory of the proletariat or whatever.

Hendrika and I visited the ghoul-like, cavernous main library in East Berlin. It was necessary to purchase a pass to enter, and only East Berlin students and visitors from non-communist nations were permitted inside. Every room had a guard, and we had to sign a registry and show our passes before entering it. There were vast empty spaces inside, perhaps symbolizing the vast Yukon Territory of knowledge beyond the pale. The local folks using that library didn’t seem to be emitting any mental sparks — maybe intellectual curiosity was considered a thought crime, too? The East Germans toiling with books and papers probably knew that anyone who raced across No Man’s Land to some forbidden idea might be terminated with extreme prejudice. Why have libraries where thinking was a crime? Any government terrified of ideas must be doing something wrong.

As we gallivanted around East Berlin, Hendrika rattled on about life on her commune in southern Holland. She talked of being a “free spirit,” and I soon realized that the Dutch translation meant “also does animals.” She bragged of frolicking with any and all types of mammals with no reservations or prejudices. She was the first person I met who viewed anthrax as a sexually-transmitted disease. (And no, I didn’t.)

Exiting Berlin, I caught a ride to Frankfurt with a friendly young leftist German university student. He said that there was not much difference between “freedom” in West and East Berlin because some workers in West Berlin lived in an area on the edge of city with no subway station and only one supermarket. He lamented that it took them half an hour via a bus line to get to the center of the city. Hence, they had no freedom — just like the people in East Berlin. He stressed that East Germany had many advantages over West Germany, such as free health care and zero unemployment. Maybe he wasn’t aware that the D.D.R. government dictated the occupation each young person must follow? Did this guy not notice the food in the East German markets was utterly grim — almost zero fresh fruits aside from apples? I was puzzled why someone who seemed quite intelligent was utterly oblivious to the catastrophic consequences of destroying economic freedom.

I did not catch the guy’s name and have no idea what happened to him. Maybe I should check to see if there are any German academics on Bernie Sander’s economic policy team. Maybe this guy helped inspire Bernie’s denunciation of “23 underarm spray deodorants” in capitalist stores?

A decade later, I crossed the Berlin Wall plenty of times while getting dirt for articles I wrote for New York Times, Reader’s Digest, Wall Street Journal , and other publications . I caught hell a number of times at East Bloc border crossings but never had a problem in Berlin.

The Austrian Theory of Efficiency and the Role of Government

Roy Cordato — Sat, 09 Nov 2019 14:00:00 -0600

Introduction

Orthodox public goods theory and its corollary — the standard economic justification for government intervention — have both been based on particular definitions of efficiency and optimality. According to the orthodox approach, if a market is not operating "efficiently," some sort of government intervention to correct the inefficiency may be warranted. But this view of efficiency is derived directly from a neoclassical view of market structures and in particular from the notion of perfect competition.

The point to be emphasized in this paper is that if one starts with a different view of efficiency and market optimality, an entirely different set of conclusions relative to government intervention can be reached. In particular we will examine the approach to economics taken by the Austrian School and detail how that approach is applied to arrive at the Austrian theory of efficiency. In addition, we will examine how Austrians view government interventions into the market and their ultimate conclusions on the role of government in society.

The Neoclassical Approach to Efficiency: An Overview1

Before beginning a discussion of the Austrian model, a brief examination of the orthodox, neoclassical perspective is necessary. This examination will help sharpen our understanding of the major differences in both methodology and final policy conclusions that separate the two points of view.

There are two cornerstones that provide the foundation for the traditional discussion of efficiency. These are the concepts of Pareto optimality and perfect competition.

When viewed in its most basic form, a Pareto optimum represents a static state of affairs within which no possible change can be made that would result in one person being made better off without another person being made worse off. This notion is important to our discussion because it has been adopted by most economists as the state of perfect "efficiency" in economic affairs. In other words, to achieve a perfectly efficient market, all economic transactions in society should be such that no one is made better off at the expense of another. In addition, the final equilibrium should represent a situation where no further transactions can be made without violating the Paretian rule.

It is at this point that the neoclassical notion of perfect competition comes into play. It can be demonstrated that the equality of marginal cost and price that is inherent in the perfectly competitive model is sufficient to insure Pareto optimality, and, therefore, "efficiency" in the market. When price equals marginal cost, the marginal benefit received by the consumer (reflected by the price) equals the marginal value of the alternate uses of the factors that went into the production of the output (given by marginal cost). Under these circumstances if output were increased, the value to the consumer of the added product would be less than the value given up from other uses. On the other hand, if output were reduced the value lost would be greater than the value to be gained in some alternative use. In both instances one sector is being made better off at the expense of another. Hence this state, where marginal cost equals price or marginal benefit, is Pareto optimal and efficient, and any deviation from this equality is always less efficient.

We have now reviewed the standard against which the relative efficiency of a market is measured and, consequently, by which the necessity of government intervention into the market (to correct "inefficiency") is determined. From a neoclassical perspective, market inefficiency is an indication of "market failure" and may call for government intervention to make the market succeed, i.e., be efficient. Certain classic situations exist where, by employing these neoclassical standards, markets inherently fail, and the orthodox view is that intervention is necessary. For illustrative purposes I will briefly examine two of these: pure public goods, and the externalities "problem."

Definitionally, a pure public good is one in which benefits to additional consumers can be provided without additional costs to the producer. The most commonly given example of a pure public good is national defense. Because the marginal cost of producing additional "defense" is assumed to be zero, price would have to equal zero for the market to work "efficiently" in a neoclassical sense. Since no one in the private market would provide this type of good at the "efficient" price, it is argued that the government's responsibility is to step in and provide such outputs.

The second situation is the "problem" of externalities. Here costs and benefits external to both the buyer and the seller are being produced, and these externalities are not being considered when price and quantity are determined. Therefore, the real marginal cost and marginal benefit are not being equated and the result is "market failure." The typical solution suggested here is subsidization, taxation, or direct regulation, in order to insure the efficient price-output combination. The most common example of this problem is pollution, where the costs incurred by a community because of polluted air are not considered by the firm creating the pollution.

It should be emphasized at this point that this neoclassical notion of market externalities brings into play the idea of costs and benefits to society as a whole and the expanded concept of social efficiency. This concept is usually presented as being distinct from the efficient actions of individuals within the society. I note this for one reason — in the following discussion on the Austrian theory of efficiency we will see that from its perspective there can be no rational explanation of "efficiency" apart from the individual actors that make up society.

The Methodology of Austrian Economics

Individual valuation is the keystone of economic theory.2
M. N. Rothhard

The importance of the work of the Austrian School for the history of ideas finds perhaps its most suggestive expression in the fact that here, acting man-stands in the center bf economic events.3
Ludwig M. Lachmann

It is this consistent focus on the actions and subjective valuations of individuals that distinguishes the methodology of the Austrian School from all other approaches to economic theory. This approach, sometimes referred to as "methodological individualism" or "radical subjectivism," stems from the fact that Austrians see economics as a branch of the more general science of human action or praxeology.4

To truly understand the Austrian point of view, it is necessary to understand the concept of human action as the Austrians define it. Simply stated, human action is viewed as "purposeful behavior."5 In other words, it is the application of specific means to achieve desired ends. This concept of human action has been developed, with respect to economics, most thoroughly in the writings of economist Ludwig von Mises, and the notion might best be summed up and clarified in his words:

No sensible proposition concerning human action can be asserted without reference to what the acting individuals are aiming at and what they consider as success or failure, as profit or loss.6

Due to the nature of their existence all humans act and all economic activity is based on action. It therefore follows that Austrians see praxeology as the logical foundation for economic science. The question for Austrians then becomes, how does the purposive behavior of all individuals and the means they choose to accomplish those purposes interact in a market economy? As one observer put it in explaining the views of Ludwig Lachmann:7

Economic phenomena cannot be explained unless they are related, either directly or indirectly, to subjective states of valuation as manifested either in choice or in expectations about the market.8

This notion of subjective valuation and the purposes and choices of individuals permeates every aspect of Austrian economic analysis. For example, the concept of cost is defined completely in terms of privately perceived foregone opportunities,9 the market rate of interest is the expression of the individual time preferences of the members of society,10 and as we shall see in detail below, efficiency is expressed in light of the success or failure of individual plans.11

The Austrian Theory of Efficiency12

A. Efficiency and the Individual. Consistent with their approach to all economic analysis, Austrians begin their discussion of efficiency by first focusing on the individual. The problem then becomes, what constitutes efficient activity for the individual actors in society? In answering this question the Austrians again turn to the praxeological roots of their analysis. From this they conclude that efficiency must be seen in terms of the purposeful behavior of individuals, and more specifically, whether that behavior is consistent with attaining the purposes and goals that are being sought. To the Austrian economist, then, an efficient course of action would be to apply means that are consistent with attaining the desired goal or program of goals. Inefficiency arises when means are chosen that are inconsistent with the desired goals.

It should be made clear that the particular nature of the goals being pursued has no bearing on the analysis. These are taken as given. They are derived from the subjective valuations and preferences of each individual. It is not the ends whose efficiency is under question, but the means used to attain them. I point this out, because, very often obtaining something for the smallest available monetary cost or for the smallest possible input of time is considered "efficient." But, if these aspects are considered as part of a program of goals by the individual, they need not be of concern to the economist. For example, suppose a person set out to spend an entire afternoon mowing a lawn that he could possibly finish in an hour. Because it was part of his goal, the fact that he took the extra time could not be seen as inefficient. In fact, if he finished mowing the lawn in an hour in spite of the fact that he had planned to spend the entire afternoon, it then could be said that he acted inefficiently. Assuming he did not change his mind during the process, his methods would be inconsistent with his goals.

To the Austrian, this notion of efficiency plays an important part in all economic analysis, for it is the crux of the economic problem facing the individual. The degree to which an individual acts efficiently will determine success and failure in his economic Life. (The word "success" is used in its subjective sense; i.e., success stems from the achievement of individually determined goals and not from what any observer sees as successful.)

B. Society and Efficiency. With the above analysis of efficiency for the individual in mind, we can now proceed to examine how Austrians view the concept of social efficiency. As with the individual, Austrians see the economic problem facing society to be that of securing efficiency. But, the important point to be made is that Austrians do not see societal efficiency apart from the efficiency of the individuals that comprise it. In other words, they recognize that society cannot have goals apart from those of the individuals within it. This notion might best be expressed in the words of Professor Israel Kirzner:

Society is made up of numerous individuals. Each individual can be viewed as independently selecting his goal program … and each individual adopts his own course of action to achieve his goals. It is therefore unrealistic to speak of society as a single unit seeking to allocate resources in order to faithfully reflect "its" given hierarchy of goals. Society has no single mind where the goals of different individuals can he ranked on a single scale.13

From this Kirzner goes on to conclude that:

Efficiency for a social system means the efficiency with which it permits its individual members to achieve their several goals.14

Given this concept of social efficiency it is easy to understand why Austrians generally agree that a free market is the most efficient system. With its emphasis on voluntary cooperation, the market economy ensures that each individual is allowed to pursue his goals in the most efficient manner available, given his knowledge of the situation.

C. Determinants of Efficiency: Knowledge and Coordination. The key to economic efficiency, for both the individual and society, is knowledge. The extent to which an individual acts efficiently will be determined by the amount of knowledge he possesses regarding the appropriate means for attaining his desired ends. A brief example can illustrate this point. Suppose Mr. Jones has established as a goal the purchase of a new car. But, because of extremely limited knowledge, he decides to go to a department store to make his purchase. It is obvious that because of ignorance, he has chosen a very inefficient course of action with respect to his desired goal. Through trial and error his knowledge will improve, and as it improves so will the efficiency of his actions. For example, someone in the department store may tell Mr. Jones that he needs to go to an automobile dealer, thus improving his knowledge of the situation and therefore the efficiency of his subsequent acts.

Efficiency for the market as a whole is also dependent on individual knowledge of market conditions. In a market economy it is the mutually beneficial nature of voluntary exchange that allows all individuals to simultaneously pursue their goals. The key to the efficient pursuit of goals in society then becomes a question of coordination between buyers and sellers, and the extent to which this coordination exists will reflect the knowledge of opportunities within the market held by its participants. To have efficiency in an economy, there must be more than just the opportunity to exchange, there must be knowledge of these opportunities on the part of buyers and sellers.

To illustrate this notion of coordination, let's go back to Mr. Jones' shopping for an automobile. Suppose he has now gained the knowledge it takes to realize that, in order to find a car at an acceptable price, he must go to various automobile dealers and make comparisons. The problem Mr. Jones now faces is this: he is willing to pay a maximum of $4,000 for a car and no dealer he knows of is willing to sell him one for that low a price. The fact is, though, that a dealer on the other side of town is willing to sell a new car for $3,500. Without the two parties knowing about each other there is no coordination of plans, and inefficiency arises in the market.

For Austrians, then, it is only when all market participants have perfect knowledge and foresight of the availability of means, that market plans will be perfectly coordinated and "perfect" efficiency will exist. To the Austrian, this notion of perfect knowledge in a market is the distinguishing feature of equilibrium. According to Kirzner:

The state of equilibrium is the state in which all actions are perfectly coordinated, each market participant dovetailing his decisions with those which he (with complete accuracy) anticipates other participants will make. The perfection of knowledge which defines the state of equilibrium ensures complete coordination of individual plans.15

From this we can conclude that a market in equilibrium is a market working with perfect efficiency.

This concept of equilibrium should not be confused with the notion of a perfectly competitive equilibrium and the neoclassical state of "perfect efficiency." The Austrian notion of perfect efficiency and market equilibrium sets no restrictions on market structure, the heterogeneity of products, or the relationship between marginal cost of production and the price of the output. It is simply a situation where "all acts are coordinated," where there are no shortages or surpluses in the market.

D. Inefficiency and the Coordinating Process. Now that we have examined the concept of efficiency, we can take a closer look at inefficiencies in a market and the process that occurs to correct them.

It should be apparent that a state of perfect efficiency, i.e., perfect knowledge, cannot be achieved completely in an economy. At any given point in time the available information will be scattered throughout the market. Some plans will be uncoordinated, and inefficiencies will arise. But, it is the "natural forces" in the market itself which act to correct for these inefficiencies. It is the market concepts of price and entrepreneurial activity that ensure the diffusion of knowledge and the tendency toward efficient use of resources, i.e., "means," in a market economy. Simply stated, it is the price system that makes available the pertinent information, and the entrepreneur — motivated by potential profits — who takes the information and uses it in a manner that tends to improve efficiency.

The price system lets it be known that inefficiencies exist through discrepancies in the price for undifferentiated goods within the market. This is true because, everything else being equal, people will buy at the lowest prices available. With perfect knowledge of all prices, the movement toward the lower prices and away from the higher ones would, under conditions of perfect efficiency, result in a uniform market price for the good. Therefore, price discrepancies would represent the existence of imperfect knowledge, i.e., inefficiency in the market.

It should be made clear that this uniformity of price under conditions of perfect efficiency holds only for goods that are homogeneous in the mind of the consumer. For goods that are differentiated in the consumer's mind, the price discrepancies may simply reflect the relative values placed on the goods that arise from perceived differences. The point to be emphasized is that, contrary to the implications of the neoclassical model of perfect competition, homogeneous products are not more efficient to society than relatively heterogeneous products. The degree to which products are differentiated in an economy reflects individual desires and preferences and, as stated previously, the Austrian model analyzes the efficiency of the means used and not the ends desired.

Under the given conditions, then, when inefficiencies (i.e., price discrepancies) occur, the opportunity for profit will present itself to the alert entrepreneur. As Kirzner puts it:

A profit opportunity exists wherever a given resource or a given product can be bought in the market at one price and sold again for a higher price. [Therefore,] a possibility for profit exists wherever there is a price discrepancy.16

It is these opportunities for profits and the entrepreneurial activity they stimulate that tend to promote coordination and therefore efficiency in the market.

Our previous example can be used to illustrate this point. As we recall, Mr. Jones is in a position where he is willing to spend $4,000 on a car and no dealer he knows of is willing to sell for that low a price. Let's say that the lowest price he's been offered is $5,000. At the same time a dealer Mr. Jones is not aware of is willing to sell the car for $3,500. Now a price discrepancy exists and, along with it, a chance for entrepreneurial profit. Into the picture comes Mr. Smith, a profit-seeking entrepreneur, who's always on the lookout for a "fast buck." Seeing the opportunity for profit, Mr. Smith buys the car at the lower price and sells it to Mr. Jones for $4,000. What Mr. Smith has effectively done is coordinate the plans of Mr. Jones and the dealer selling at the lower price, thus improving efficiency in the market.

We can conclude from this that, in a free market, inefficiencies promote their own corrective action. Again in the words of Israel Kirzner:

A price discrepancy means a chance to make profits. By definition entrepreneurs seek profits; thus the very situation that symptomizes the need for a correction creates the force capable of inducing such actions. Moreover … the entrepreneurial search for profits implies a search for situations where resources are misallocated.17

One might protest that we have no assurance that entrepreneurs will recognize every inefficiency in the market or correctly perceive the ones that do exist, and this is true. But the fact remains that the market will reward successful entrepreneurs and penalize unsuccessful ones. Therefore, "the market process itself … attracts only those most able and competent to direct the future course of the process."18 As Kirzner concludes: "If the best entrepreneurial talent is insufficient to remove all misallocations, even with the inducement of the profit motive, then the remaining misallocations must simply be undetectable."19 (Kirzner uses the term "misallocation" to refer to a situation caused by discoordination of plans and therefore inefficiency in the market.20)

The Role of Government

From our discussion up till now, it is clear that the neoclassical notion of market failure, discussed in the first section of this paper, cannot be used to justify government intervention in order to correct inefficiencies as defined from an Austrian perspective. Even though a market can never attain perfect efficiency, the corrective forces which arise from the market's own mechanism will make it as efficient as possible. In fact, any notion of market failure from the Austrian perspective would have to arise, not from the free market, but from government interventions that would distort market prices and allocate resources toward ends other than those being pursued by market participants.

In his book Market Theory and the Price System, Kirzner makes his conclusions about interference in the market perfectly clear. He states:

Interference with the webs and forces that are woven through the market process limits the attempts of participants to coordinate their activities through an engine of remarkable efficiency — the market. The analysis of the market process can clarify the costs involved through such interference, making it possible for market participants to decide, through the political process, on the extent to which they are willing to lay aside their engine of efficiency for the sake of special purposes of possibly overriding importance.21

It is clear from the first part of this statement that Kirzner feels government intervention into a market can never be justified on the basis of improving efficiency. This is both consistent with the Austrian view of efficiency and generally accepted by contemporary Austrian economists. The second part of Kirzner's statement implies that there may be a justification for government intervention on other than efficiency grounds; for "special purposes of possibly overriding importance." This leads us into the area of welfare economics and brings in considerations of utility and equity which are beyond the scope of this paper. But it should be noted that many Austrians feel that judgments on these concepts can never be made by society as a whole and can only be made by individuals. This leads to the conclusion that there is no justification for any form of government interference. This view might best be summed up in the words of the noted Austrian economist Murray N. Rothbard:

No government interference with exchanges can ever increase social utility … whenever government forces anyone to make an exchange which he would not have made, this person loses in utility as a result of the coercion. But taxation is just such a coerced exchange. … Since some lose bv the existence of taxes, therefore, and since all government actions rest-on its taxing power, we deduce that: no act of government whatever can increase social utility.22

This may appear to be an extreme position, but it is consistent with the radical subjectivist nature of Austrian methodology.

The question might now arise as to how the problems in society that have been traditionally taken care of by government would be handled. What about the externalities "problem" and all the "public goods" that governments have traditionally provided? A full explanation of how the free market would take over all of the functions of government would, again, be beyond the scope of this paper. This subject has been covered in quite some detail in a number of volumes.23 But briefly, "public goods" such as roads, education, parks, and, in a Rothbardian system, courts and defense, would be services provided by the market as demand conditions warranted. The fact that these services could not be priced where marginal cost equals marginal benefit would have no bearing on efficiency from an Austrian point of view. It also must be realized that a completely free-market economy implies a clearly defined system of property rights to all resources in society. It is this system of property rights that would act as the general regulator of all social and economic acts. To be more specific, the problem of spillovers and externalities would be nothing more than a problem of property rights violation, and would be handled through the courts just as for any other act of aggression.

It should be noted here that most neoclassical economists also view externalities, such as pollution, as a problem of unenforced property rights. The crucial difference is that the neoclassicist sees property rights as variable and to be granted, presumably by the state, on the basis of who stands to benefit most or to lose least from the particular rights assignment.24 This is consistent with the neoclassical notion of social efficiency mentioned in the first section of this paper, the logic being that if property rights are assigned to the party with the most to gain or least to lose as a result of the externality, the net benefit to society will be increased, and social efficiency will be improved.25

The Austrian approach is quite different. Along with the objection to interpersonal cost-benefit analysis and social efficiency implied by the subjectivist nature of Austrian methodology,26 there is a major difference in the Austrian view of property rights in general. It should be clear that in order to pursue goals and make plans it is necessary to have a system of property rights that is clearly defined and that each individual can count on into his foreseeable future. Any involuntary alteration of a given property rights structure will necessarily interfere with plans being made by some owners of property with respect to the pursuit of their goals. Because of this, Austrians take the particular property rights system as given and examine the efficiency of actions within the confines of the rights arrangement. As one Austrian economist has put it:

A property rights system lays down the rules, it defines the freedoms and restrictions according to which we evaluate alternatives and make choices, hut as such it is conceptually distinct from alternatives among which we choose.27

On what basis, then, do Austrians believe property rights should be assigned? The answer to this might best be expressed by Prof. Rothbard. He states that:

We cannot decide on … rights or liabilities on the basis of efficiencies or minimizing of costs. But if not costs or efficiency, then what? The answer is that only ethical principles can serve as criteria for our decisions. Efficiency can never serve as the basis for ethics; on the contrary, ethics must be the guide and touchstone for any consideration of efficiency.28

In other words, it is felt that the choice of a particular property rights structure is beyond the realm of economic science, and has no place in positive discussions of efficiency. Dr. Rothbard goes on to conclude that:

Economists will have to get used to the idea that not all of life can be encompassed by our own discipline. A painful lesson no doubt, but compensated by the knowledge that it may be good for our souls to realize our own limits-and, just perhaps, to learn about ethics and about justice.29

Concluding Remarks

This paper has brought to light the fact that there is more than one approach to the concept of efficiency in the economic literature. Furthermore, depending on which theory of efficiency is adopted, one can arrive at far different conclusions concerning the role of the state both in the economy and in society in general. It should be apparent that all methodologies within economics deserve full consideration by scholars and analysts. It is only after the alternatives have been considered that intelligent decisions can be made concerning the role economics should play in policy analysis.

1. The discussion in this section has been generalized entirely from H. T. Kolin, Microeconomic Analysis, Welfare and Efficiency in Private and Public Sectors (New York: Harper and Row, 1971), pp. 10–14, 25–60.
2. Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics," Occasional Papers Series, #3 (New York: Center for Libertarian Studies, 1977), p. 1.
3. Lawrence H. White, "Methodology of the Austrian School," Occasional Papers Series, #1, (New York: Center for Libertarian Studies, 1977), p. 1.
4. Ibid., p. 9.
5. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 1972), p. 1.
6. Ludwig von Mises, The Ultimate Foundations of Economic Science, with a Foreword by Israel Kirzner, 2nd ed. (Kansas City: Sheed, Andrews, and McMeel, 1978 p. 80.
7. Ludwig M. Lachmann, along with F. A. Hayek, is one of the elder statesmen of currently active Austrian economists. He is presently Visiting Professor at New York University.
8. Walter E. Grinder, "In Pursuit of the Subjective Paradigm," Introduction to Ludwig M. Lachmann's Capital, Expectations and the Market Process: Essays on the Theory of the Market Process (Kansas City: Sheed, Andrews, and McMeel, 1977), p. 3.
9. Israel Kirzner, Market Theory and the Price System (Princeton, N.J.: D. Van Nostrand Co., 1963), p. 184.
10. Grinder, "In Pursuit of the Subjective Paradigm," p. 4.
11. Kirzner, Market Theory, pp. 34, 35.
12. The major points in this section (A–D) have been extrapolated from Kirzner's Market Theory, pp. 33–44, 297–310; and also his Competition and Entrepreneurship (Chicago and London: University of Chicago Press, 1973), pp. 13–17, 212–31. All examples used are my own.
13. Kirzner, Market Theory, p. 35.
14. Ibid.
15. Kirzner, Competition, p. 218.
16. Kirzner, Market Theory, pp. 302–303.
17. Ibid., p. 303.
18. Ibid., p. 304.
19. Ibid.
20. Ibid., p. 301.
21. Ibid., p. 309.
22. Rothbard, "Toward a Reconstruction," p. 29.
23. See Rothbard, For New Liberty (New York: Collier MacMillan, 1978); David Friedman, Machinery of Freedom: Guide to a Radical Capitalism (New Rochelle, N.Y.: Arlington House. 1973): and Jarret B. Wollstein. "Public Services Under Laissez-Faire," (publisher not given).
24. Harold Demsetz. "Ethics and Efficiency in Property Rights Systems," in Mario J. Rizzo, ed., Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes (Lexington, Mass.: Lexington Books, D.C. Heath and Co., 1979), pp. 102û104.
25. Ibid., p. 101.
26. John B. Egger, "Comment: Efficiency is Not a Substitute for Ethics," in Rizzo, Time, Uncertainty, p. 121.
27. Ibid., p. 121.
28. Rothbard, "Comment: The Myth of Efficiency," in Rizzo, Time, Uncertainty, p. 95.
29. Ibid.

The Cost of Government Is Rising Much Faster than Housing and Healthcare

Bradley Thomas — Sat, 09 Nov 2019 11:00:00 -0600

This year, as it has for several consecutive years now, the Tax Foundation reported that “Americans will collectively spend more on taxes in 2019 than they will on food, clothing, and housing combined.”

That the combined federal, state and local tax bill for the American populace is larger than the amount we spend on essential costs of living like food, clothing and housing certainly is an attention-grabbing snapshot of the federal government leviathan.

But what about the trendline? In other words, is the cost of funding government growing at a faster clip than other costs of living?

Indeed, for decades now, politicians have promised to make items like housing and healthcare more “affordable,” but such efforts seem to have made those problems worse.

What about making government more “affordable”?

Unsurprisingly, as rapidly of the cost of living has been rising for the last quarter century, in particular in housing and healthcare, the cost of the federal government has been rising significantly faster.

We can examine the cost of the federal government by tracking per capita federal government tax receipts and spending from 1993 to 2018.1 Tax receipts serves as a reasonable — albeit incomplete — proxy for the direct cost to citizens of financing the federal government.

Moreover, federal outlays — including deficit spending — is a reflection of the costs imposed on the citizens and its economy because it represents the amount of scarce resources being controlled by the government instead of private citizens.

Both measures are important components that evaluate what Murray Rothbard described as “the parasitic burden of government taxes and spending upon the productive activities of the private sector.”

As shown in the graph below, nominal per capita federal receipts ballooned by 122 percent between 1993 and 2018, while nominal per capita federal government outlays climbed by an even more dramatic 132 percent.

Compare this growth rate to the cumulative growth rate of the Consumer Price Index (CPI) – a measure intended to reflect the overall cost of living for the average citizen – of 73 percent during that time.2 In other words, the cost of the federal government to citizens grew at a rate two-thirds faster than the overall price index.

The Federal Reserve has aided in an alarming increase in the overall cost of living, but that pales in comparison to the growth rate of the costs imposed by the federal government over the last two-and-a-half decades.

We can also evaluate the federal government’s growth rate against the rising cost of common items like housing and utilities, clothing, groceries — and yes, even healthcare.

Think your dollar doesn’t go as far at the grocery store as it did in the 1990s? Of course it doesn’t. But the price index for groceries rose at a rate only half of the rate of growth of federal government tax receipts since 1993, and less that half the rate of federal government outlays.

Here we see that, despite federal policies to inflate and then re-inflate housing bubbles, that the cost of housing & utilities rose by 97 percent since 1993. A concerning rate to be sure, but well short of the federal government’s growth rates.

Healthcare costs, the focus of so much political consternation, including the significant overhaul in 2010 known as Obamacare, grew by 83 percent between 1993 and 2018 — a rate roughly 40 and 50 percentage points lower than the growth of per capita federal government tax receipts and outlays, respectively.3

It’s interesting to note that prominent Democratic presidential nominees like Bernie Sanders and Elizabeth Warren decry the rising cost of healthcare and housing as virtually criminal but fail to acknowledge that the cost of federal government has been rising at a far higher pace.

Moreover, how compelling it is to note that the cost of clothing/footwear, by far the least regulated of the items listed, has actually fallen by 14 percent since 1993.

Many people lament the rising costs of living over time, especially of items like housing and health care, and they are right to do so. But so many simply take for granted the largesse of the federal government, and fail to recognize the dramatically increasing fiscal burden being imposed by Uncle Sam.

1. Total federal outlays taken from the Tax Policy Center chart, accessed here: https://www.taxpolicycenter.org/statistics/federal-receipt-and-outlay-summary
Total nominal annual federal tax receipts obtained from the St. Louis Fed data series, accessed here: https://fred.stlouisfed.org/series/W006RC1A027NBEA#0
U.S. population figures used to calculate per capita amounts taken from US Census Bureau data aggregated here: https://www.multpl.com/united-states-population/table/by-year
2. CPI measure taken from Jan. of each year, within each given fiscal year. Data accessed online June 6, 2019 at https://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx?reloaded=true
3. Price indexes for specific goods accessed from: Federal Reserve of St. Louis, Table 2.3.4. Price Indexes for Personal Consumption Expenditures by Type of Product. Available at https://fred.stlouisfed.org/release/tables?rid=53&eid=43831&od=1988-01-01#

Why Government Should Not Fight Deflation

Frank Shostak — Sat, 09 Nov 2019 06:00:00 -0600

For most experts, deflation is considered bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.

This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators hold that policies that counter deflation will also counter the slump.

Will Reversing Deflation Prevent a Slump?

If deflation leads to an economic slump, then policies that reverse deflation should be good for the economy. Or so it is held.

Reversing deflation will simply involve introducing policies that support general increases in the prices of goods, i.e., price inflation. With this way of thinking inflation could actually be an agent of economic growth.

According to most experts, a little bit of inflation can actually be a good thing. Mainstream economists believe that inflation of 2 percent is not harmful to economic growth, but that inflation of 10 percent could be bad for the economy.

There’s good reason to believe, however, that at a rate of inflation of 10 percent, it is likely that consumers are going to form rising inflation expectations.

According to popular thinking, in response to a high rate of inflation, consumers will speed up their expenditures on goods at present, which should boost economic growth. So why then is a rate of inflation of 10 percent or higher regarded by experts as a bad thing? Clearly there is a problem with the popular way of thinking.

Price Inflation vs. Money-Supply Inflation

Inflation is not about general increases in prices as such, but about the increase in money supply. As a rule the increase in money supply sets in motion general increases in prices. This, however, need not always be the case.

The price of a good is the amount of money asked per unit of it. For a constant amount of money and an expanding quantity of goods, prices will actually fall. Prices will also fall when the rate of increase in the supply of goods exceeds the rate of increase in the money supply. For instance, if the money supply increases by 5 percent and the quantity of goods increases by 10 percent, prices will fall by 5 percent.

A fall in prices however cannot conceal the fact that we have inflation of 5 percent here on account of the increase in the money supply.

The reason why inflation is bad news is not because of increases in prices as such, but because of the damage inflation inflicts to the wealth-formation process. Here is why.

The chief role of money is the medium of exchange. Money enables us to exchange something we have for something we want. Before an exchange can take place, an individual must have something useful that he can exchange for money. Once he secures the money, he can then exchange it for the goods he wants.

But now consider a situation in which the money is created "out of thin air," increasing the money supply. This new money is no different from counterfeit money. The counterfeiter exchanges the printed money for goods without producing anything useful. He in fact exchanges nothing for something. He takes from the pool of real goods without making any contribution to the pool.

Note that as a result of the increase in the money supply what we have here is more money per unit of goods, and thus, higher prices.

What matters however is not that prices rise, but the increase in the money supply that sets in motion the exchange of nothing for something, or "the counterfeit effect." The exchange of nothing for something, as we have seen, weakens the process of real wealth formation. Therefore, anything that promotes increases in the money supply can only make things much worse.

Why Falling Prices Are Good

Changes in prices are just a symptom, as it were — and not the primary causative factor — of a falling growth momentum. Thus attempts to reverse price deflation by means of a loose monetary policy (i.e., by creating inflation) is bad news for the process of wealth generation, and hence for the economy. On the other hand, in order to maintain their lives and well-being, individuals must buy goods and services in the present. So from this perspective a fall in prices cannot be bad for the economy.

Furthermore, if a fall in the growth momentum of prices emerges on the back of the collapse of bubble activities in response to a softer monetary growth, then this should be seen as good news. The fewer non-productive bubble activities we have, the better it is for the wealth generators, and hence for the overall pool of real wealth.

Likewise, if a fall in the growth momentum of the CPI emerges on account of the expansion in real wealth for a given stock of money, this is obviously great news since many more people could now benefit from the expanding pool of real wealth.

We can thus conclude that contrary to the popular view, a fall in the growth momentum of prices is always good news for the wealth generating process and hence for the economy.

The Berlin Wall Reminds Us of What Happens After We "Smash Capitalism"

Ryan McMaken — Fri, 08 Nov 2019 15:45:00 -0600

This week marks the thirtieth anniversary of the fall of the Berlin Wall. Decades later, the wall remains a symbol of the violence employed by socialist states, and a reminder that the egalitarian workers' paradise of East Germany was so hated by its residents that the state had to build a wall to keep residents in.

It is ironic, then, that only a generation later, Americans are becoming increasingly enamored with socialism. According to a recent Gallup poll, 43 percent of Americans say socialism is a "good thing." It's unclear how many of those respondents can actually define socialism. Some believe socialism to simply be policies that promote equality. Others define it using the more historically orthodox view: government ownership of the means of production.

There is no doubt, however, that a vocal and not-insignificant minority — of the sort represented by Jacobin magazine, for example — advocates for the total destruction of capitalism.

When American democratic socialists who want to "smash capitalism" say they like "socialism," of course, they are likely to add that they don't want the sort of socialism they had in East Germany. They want kindly, happy, well-lit socialism. Not the gray, dour, socialism of the Eastern Bloc.

I have no doubt this is indeed what they want, although that's what the founders of East Germany and the Soviet Bloc thought they would get too. Many of them no doubt truly believed they were leading the way to a kinder, gentler, more equal society.

After all, up until the 1980s, the socialists of the Eastern Bloc were still entertaining the idea that they could deliver a higher standard of living to ordinary people than could the "decadent" economies of the West.

In 1959, of course, Richard Nixon and Nikita Khrushchev literally debated whether the West or the Communist world could deliver the best kitchen appliances to the general public.

Obviously, the West won that debate, although many Western socialists failed to get the memo. Right up until the end (of the Soviet Bloc) the highly influential American economist Paul Samuelson maintained that communist economies worked perfectly well. As David Henderson noted in 2009:

Samuelson had an amazingly tin ear about communism. As early as the 1960s, economist G. Warren Nutter at the University of Virginia had done empirical work showing that the much-vaunted economic growth in the Soviet Union was a myth. Samuelson did not pay attention. In the 1989 edition of his textbook, Samuelson and William Nordhaus wrote, "the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive."

As it turned out, the socialist economies — designed to deliver an easier life to consumers and workers — were really vehicles of impoverishment, not to mention environmental degradation.

A Lasting Legacy of Poverty

To this day — thirty years after re-unification — the standard of living is lower in the parts of Germany that were once part of East Germany. In 2014, for example, the Washington Post reported how East Germany has lower levels of disposable income, high unemployment rates, and is generally less prosperous. This in turn has led to the old East Germany having fewer young people, many of whom move west for better jobs. Fortune's Chris Matthews went on to observe "If you look at statistics such as per capita income or worker productivity, they also point to the large disparity in economic development between east and west."

And Claudia Bracholdt further notes: "Today, Germany’s east has many structural problems similar to those of countries like Greece and Spain, though on a much smaller scale."

During the Cold War, numerous opponents of Communism pointed to Germany as the perfect example of how soviet-style communism destroyed economic prosperity. But that was then. Nowadays, the East German regime is gone, and Germany is, relatively speaking, one of the most market-oriented economies on earth. Eastern Germany shares a government with western Germany. So, why is eastern Germany still poor compared to its western German neighbors?

The answer lies in the fact that even though the legal and political systems in eastern Germany are the same as in the West, the East suffers from the fact that it lost out on decades of capital accumulation and growth in worker productivity while under the boot of the Soviets.

The German case offers the most excellent comparison of course, because prior to World War II, western and eastern Germans enjoyed similar political systems for many decades. Moreover, the western and eastern Germans were similar both ethnically and culturally. Thus, the comparison allows us to focus on regime differences in the age of the Cold War.

We can look beyond just the East Germans as well. We might ask ourselves, for example, why Poland, with its Western orientation and long tradition of parliamentary and decentralized governments remains so relatively poor.

The same might be said of the Czech Republic as well, where the principal city, Prague, was once the second city of the Austrian Empire and was a center of European wealth and culture. The Czechs too, have never regained their relative place in terms of European wealth.

Part of the explanation lies in the fact that the legacy of an abandoned political system can live on for decades even after regime change. As Nicolás Cachanosky has observed in the context of South American regimes:

Institutional changes ... define the long-run destiny of a country, not its short-run prosperity. ... For example, as China opened parts of its economy to international markets, the country started to grow, and we are now seeing the effects of decades of relative economic liberalization. It is true that many areas in China continue to lack significant freedoms, but it would be a much different China today had it refused to change its institutions decades ago.

Clearly, the fact that the old Eastern Bloc countries have moved toward liberalization has set those countries on a path toward greater economic prosperity. That by itself, however, cannot put it on a par with countries that never suffered the effects of decades of communism.

Smash Capitalism: And Replace it With What?

The experience of the Eastern Bloc should serve to inoculate us against the idea that a market based system can be replaced wholesale, and that a decent standard of living can still be achieved.

It is one thing to advocate for a five-percent increase in government spending on the pension system. It's another to advocate for the nationalization of the banking sector or — even worse — expropriating every major industry. Yet, the smash-capitalism crowd thinks they want the latter.

But the US isn't as far from the socialist end of the spectrum as many think. After all, the United States is itself already far down the road of the typical Western welfare state. Contrary to the persistent myth that the United States is some sort of laissez-faire free-for-all, the US welfare state in terms of social spending is already comparable to that of Canada, Australia, the Netherlands, and Switzerland. If the Netherlands is "socialist," then so is the United States.

Yet we're being told the US needs to just move a little more to left to be like its European "peers." Except the US is already there. So how much further must it be moved in the direction of even more government control of its economy?

The socialists give no answer beyond "we'll let you know when we get there."

But it is not necessary to completely destroy capitalism to ensure a less prosperous future. That is, we need not become a clone a East Germany to share at least a share of its fate. Suffice it to say, the further a regime move in the direction of the "egalitarian" states of the old communist world, the worse the impoverishment will be.

FDR and the Collectivist Wave

Ralph Raico — Fri, 08 Nov 2019 14:00:00 -0600

In granting official diplomatic recognition to the Soviet Union in November 1933 Franklin Roosevelt was "unintentionally," of course, returning to the traditions of American foreign policy.

From the early days of the Republic, throughout the 19th century and into the 20th — in the days, that is, of the doctrine of neutrality and nonintervention — the US government did not concern itself with the morality, or, often, rank immorality, of foreign states. That a regime was in effective control of a country was sufficient grounds for acknowledging it to be, in fact, the government of that country.

Woodrow Wilson broke with this tradition in 1913, when he refused to recognize the Mexican government of Victoriano Huerta, and again a few years later, in the case of Costa Rica. Now "moral standards," as understood in Washington, DC — the new, self-anointed Vatican of international morality — would determine which foreign governments the United States deigned to have dealings with and which not.

When the Bolsheviks seized power in Russia, Wilson applied his self-concocted criterion, and refused recognition. Henry L. Stimson, Hoover's secretary of state, applied the same doctrine when the Japanese occupied Manchuria, in northern China, and established a subservient regime in what they called Manchukuo. It was a method of signaling disapproval of Japanese expansionism, though there was no doubt that the Japanese soon came into effective control of the area, which had been more or less under the sway of competing warlords before.

In later years, Roosevelt would adopt the Stimson doctrine of nonrecognition and even make Stimson his secretary of war. But in 1933 all moral criteria were thrown overboard. The United States, the last holdout among the major powers, gave in, and Roosevelt began negotiations to welcome the model killer state of the century into the community of nations.

Recognizing Soviet Russia

To the Soviet negotiator, Foreign Minister Maxim Litvinov, FDR presented his two chief concerns. One had to do with the activities of the Comintern. This worldwide organization is often ignored or slighted in accounts of the interwar years, but the fact is that the history of the period from 1918 to the Second World War cannot be understood without a knowledge of its purpose and methods.

With his seizure of power in Russia, Lenin turned immediately to his real goal, world revolution. He invited members of all the old socialist parties to join a new grouping, the Communist International, or Comintern. Many did, and new parties were formed — the Communist Party of France (CPF), the Communist Party of China (CPC), the Communist Party of the United States (CPUSA), and so on, all under the control of the mother party in Moscow (CPSU).

The openly proclaimed aim of the Comintern was the overthrow of all "capitalist" governments and the establishment of a universal state under Red auspices. Hypocrisy was not one of Lenin's many vices: the founding documents of the Comintern explicitly declared that the member parties and movements were to use whatever means — legal or illegal, peaceful or violent — that might be appropriate to their situations at any given time.

This was the stark specter facing the non-Communist nations in the decades before World War II: a power covering one-sixth of the earth's surface had at its command a global movement that was fighting to wrest control of organized labor everywhere, fomenting revolutions in the colonial regions, vying for the allegiance of the western intelligentsia, and planting spies wherever it could — all with the goal of bringing the blessings of Bolshevism to the all of the world's peoples.

The first commitment FDR asked of Litvinov was that the Comintern should cease subversion and agitation within the United States. This the Soviet minister readily agreed to. When, less than two years later, Washington complained that Russia was not living up to its agreement, Litvinov, in true Leninist fashion, denied that any such pledge had been given.

The second major point brought up in the negotiations involved freedom of religion in Soviet Russia. Ever the politician, Roosevelt was worried about Catholic hostility to the Red regime, a hostility based on the murder of thousands of priests, the wholesale destruction of churches, and the ongoing crusade to stamp out all religious faith.

In discussing the issue with Litvinov, FDR caused the foreign minister acute embarrassment. He brought up Litnivov's parents, who, Franklin supposed, had been pious, observant Jews. They must have taught little Maxim to say his Hebrew prayers, the president averred, and deep down Litvinov could not be the atheist he, as a good Communist, claimed to be. Religion was very important to the American people, and many would oppose recognition unless the regime ceased its persecutions. "That's all I ask, Max — to have Russia recognize freedom of religion." It was Franklin at his most fatuous.

In the end, Roosevelt got Litvinov to concede that Americans in the Soviet Union would have religious freedom, which was never in doubt anyway, and palmed this off as a major Communist concession. FDR had won the public-relations contest once again. When Ukrainian-Americans tried to hold protest rallies in New York and Chicago, they were broken up by Communist goons.

Roosevelt's strange bias toward the Stalinist regime continued to the end of his life. The massive documentation accumulating in the hands of the State Department on the real events in Russia was never made public, although it could have affected the great debate going on, in the United States and throughout the world, on the relative merits of communism and capitalism.

Nor did FDR's State Department ever issue any complaints on Soviet crimes, not on the terror famine, not on the Gulag, not on the purge trials, not on the never-ending executions, including the Katyn massacre of Polish POWs. Yet before the United States entered the war, Secretary of State Cordell Hull frequently called the German envoy on the carpet for the Nazi persecution of the Jews.

The grotesque double standard in judging Communist and Nazi atrocities, which Joseph Sobran keeps pointing out and which continues to this day, originated with the administration of Franklin Roosevelt.

The Collectivist Wave

There was a peculiar affinity between Roosevelt's New Deal and the European dictatorships that on occasion extended even to fascism and national socialism (the correct term, incidentally, for which "Nazism" is a nickname). Early on, FDR referred to Benito Mussolini as "the admirable Italian gentleman," stating to his ambassador in Rome, "I am much interested and deeply impressed by what he has accomplished" (though Franklin's praise of the founder of fascism stopped far short of Winston Churchill's gushing admiration of Il Duce at this time).

Mussolini, in turn, was flattered by what he saw as the New Deal's aping of his own corporate state, in the NRA and other early measures. When Roosevelt "torpedoed" the London Economic Conference of June 1933, Reichsbank President Hjalmar Schacht smugly told the official Nazi newspaper Völkischer Beobachter that the American leader had adopted the economic philosophy of Hitler and Mussolini. Even Hitler had kind words at first for Roosevelt's "dynamic" leadership, stating that "I have sympathy with President Roosevelt because he marches straight to his objective over Congress, over lobbies, over stubborn bureaucracies."

What linked the New Deal to the regimes in Italy and Germany, as well as in Soviet Russia, was their fellowship in the wave of collectivism that was sweeping the world. In an essay published in 1933, John Maynard Keynes observed this trend and expressed his sympathy with the "variety of politico-economic experiments" under way in the continental dictatorships as well as in the United States. All of them, he gloated, were turning their backs on the old, discredited laissez-faire and embracing national planning in one form or another.

It goes without saying that the New Deal was a much milder form of the collectivist plague. (Italian fascism, too, never remotely matched the brutality and oppression of Nazi Germany and Communist Russia.) It is a matter of family resemblances. All of these systems tilted the balance sharply towards the state and away from society. In all of them, government gained power at the expense of the people, with the leaders seeking to impose a philosophy of life that subordinated the individual to the needs of the community — as defined by the state.

The inner affinities of the New Deal with the continental dictatorships is well illustrated by a program that was one of FDR's favorites.

The Civilian Conservation Corps

One of the first measures passed during FDR's first hundred days was the act establishing the Civilian Conservation Corps (CCC). Young men were enrolled as amateur forest rangers, marsh drainers, and the like, on projects designed to improve the countryside. The recruits were given room and board, clothing, and a dollar a day. More than two and half million of them passed through the camps of the Civilian Conservation Corps, until the program was abolished in 1942, when the men were needed for the draft.

In 1973, John A. Garraty published an important article on the CCC in the American Historical Review. Garraty was Gouverneur Morris Professor of American history at Columbia and later general editor of the American National Biography, a distinguished historian, and a pillar of the historical establishment. By no stretch of the imagination could he be considered one of the wretched band of Roosevelt haters.

Yet, while a warm admirer of FDR, Garraty was compelled to note the striking similarities between the CCC and parallel programs set up by the Nazis for German youth. Both were

essentially designed to keep young men out of the labor market. Roosevelt described work camps as a means for getting youth "off the city street corners," Hitler as a way of keeping them from "rotting helplessly in the streets." In both countries much was made of the beneficial social results of mixing thousands of young people from different walks of life in the camps. … Furthermore, both were organized on semimilitary lines with the subsidiary purposes of improving the physical fitness of potential soldiers and stimulating public commitment to national service in an emergency.

Garraty listed many other similarities between the New Deal and National Socialism. Like Roosevelt, Hitler prided himself on being a "pragmatist" in economic affairs, trying out one panacea after another. Through a multitude of new agencies and mountains of new regulations, both in Germany and America, owners and managers of enterprises found their freedom to make decisions sharply curtailed.

"Both FDR and Hitler 'tended to romanticize rural life and the virtues of an agricultural existence' and harbored dreams of the rural resettlement of urban populations."

The Nazis encouraged working-class mobility through vocational training, the democratizing youth camps, and a myriad of youth organizations. They usually favored workers as against employers in industrial disputes and, in another parallel to the New Deal, supported higher agricultural prices. Both FDR and Hitler "tended to romanticize rural life and the virtues of an agricultural existence" and harbored dreams of the rural resettlement of urban populations, which proved disappointing. Characteristically for the collectivist movements of the time, "enormous propaganda campaigns" were mounted in the United States, Germany, and Italy (as well, of course, as in Russia) to fire up enthusiasm for the government's programs.

It is no wonder, then, as Professor Garraty writes, that "during the first years of the New Deal the German press praised him [Roosevelt] and the New Deal to the skies. … Early New Deal policies seemed to the Nazis essentially like their own and the role of Roosevelt not very different from the Führer's."

America under FDR did not, of course, follow Germany and Russia on that fateful road to the bitter end. The main reason for this lies, as scholars such as Seymour Martin Lipset and Aaron L. Friedberg have recently written, in our deeply rooted individualist and antistatist tradition, dating back to colonial and Revolutionary times and never extinguished. Try as he might, Franklin Roosevelt could bend the American system only so far.

This article is excerpted from "FDR — The Man, the Leader, the Legacy," The Future of Freedom Foundation, 1998–2001.

Locke vs. Cohen vs. Rothbard on Homesteading

David Gordon — Fri, 08 Nov 2019 11:00:00 -0600

Last week in my article The Power of Self-Ownership, I discussed how uncomfortable self-ownership made the great Marxist political philosopher G.A. Cohen. Cohen saw that self-ownership leads to libertarianism, but he rejected libertarianism while he found self-ownership plausible. To save his socialism, he gave up self-ownership, but his reasons for doing so are weak.

If self-ownership survives Cohen's half-hearted assault, the free market is not yet out of the woods. Cohen has another argument against libertarians, this one directed at Lockean theories of property acquisition. According to the Lockean theory, individual self-owners may, by mixing their labor with unowned land and other natural resources, come to acquire it. (Some people don’t like the phrase “mixing your labor,” but Lockean accounts don’t depend on accepting it. The important notion is that you have to occupy unowned land, or do something to it, in order to acquire it.)

Cohen maintains that this theory fails just by itself to support property rights in land. It is, as it stands, incomplete. For the justification of property rights to be successful, an additional premise is needed. The premise in question is that land is initially unowned. If everyone starts off with rights to an equal share of the earth's surface and resources, the Lockean theory has nothing on which to operate.

We may grant Cohen his point, but it avails him nothing. Why should we assume that people begin with property rights of the kind he wants? He gives no argument that they do; and the assumption that property is at the start unowned is a reasonable one. Murray Rothbard with characteristic insight dissected the equal shares position:

If every man has the right to own his own person and therefore his own labor, and if by extension he owns whatever property he has “created” or gathered out of the previously unused, unowned state of nature, then who has the right to own or control the earth itself? In short, if the gatherer has the right to own the acorns or berries he picks, or the farmer his crop of wheat, who has the right to own the land on which these activities have taken place? Again, the justification for the ownership of ground land is the same for that of any other property. For no man actually ever “creates” matter: what he does is to take nature-given matter and transform it by means of his ideas and labor energy. But this is precisely what the pioneer — the homesteader — does when he clears and uses previously unused virgin land and brings it into his private ownership. The homesteader — just as the sculptor, or miner — has transformed the “nature-given” soil by his labor and his personality. The homesteader is just as much a “producer” as the others, and therefore just as legitimately the owner of his property. As in the case of the sculptor, it is difficult to see the morality of some other group expropriating the product and labor of the homesteader. (And, as in the other cases, the “world communist” solution boils down in practice to a ruling group.) Furthermore, the land communalists, who claim that the entire world population really owns the land in common, run up against the natural fact that before the homesteader, no one really used and controlled, and hence owned the land. The pioneer, or homesteader, is the man who first brings the valueless unused natural objects into production and use. (Ethics of Liberty, p. 49)

Cohen, of course, dissents. But what happens if we grant him his assumption of an equal initial division of the earth's surface? The upshot, as our author recognizes, would not be socialism but a variety of libertarianism. Since the people with the initial endowments are by hypothesis self-owners, they would be free to carry on whatever ”capitalist acts between consenting adults” they wished. Hillel Steiner, a British political philosopher much esteemed by Cohen, has devised a libertarian system of precisely this kind; and Cohen says nothing against it.

Cohen has another objection to Lockean property acquisition. Robert Nozick, for Cohen the main libertarian, included an undemanding version of the “Lockean proviso” in his account of property acquisition. As Nozick saw matters, if you acquire property, you can’t make others “worse off,” but it is easy to meet this requirement. Cohen objects that Nozick’s proviso would allow a single person to control all the property in a society. He may do so provided everyone else is slightly better off than he would have been in a society without any private property. Cohen’s student, the philosopher Michael Otsuka, explains Cohen’s objection: “Nozick’s version of the Lockean proviso is too weak, since it allows a single individual in a state of nature to engage in an enriching acquisition of all the land there is if she compensates all others by hiring them and paying them a wage that ensures they end up no worse off than they would have been if they had continued to live the meager hand-to-mouth existence of hunters and gatherers on non-private land.”

This objection rests on a complete misunderstanding of how libertarians believe that property is initially acquired. Cohen reduces the libertarian principle of initial acquisition to the proviso. In point of fact, the proviso is only a modification of the principle. You cannot acquire vast amounts of property just by your say-so, if you follow the principle; you must combine your labor in the appropriate way with unowned land in order to acquire it. If this is taken into account, it seems next-to-impossible that the nightmare Cohen has conjured up could in practice arise. Cohen eliminates the limits on property acquisition contained in the libertarian principle; and, having done so, triumphantly proclaims that libertarians recognize practically no limits to property acquisition.

If Cohen had studied Murray Rothbard, he wouldn’t have fallen into his mistake. Rothbard doesn’t include the proviso at all in his system. Why is it necessary? It is just a source of trouble.

4 Reasons Why Socialism Is Becoming More Popular

Alexander Zubatov — Fri, 08 Nov 2019 06:00:00 -0600

The newfound openness of large numbers of Americans to socialism is, by now, a well-documented phenomenon. According to a Gallup poll from earlier this year, 43% of Americans now believe that some form of socialism would be a good thing, in contrast to 51% who are still against it. A Harris poll found that four in ten Americans prefer socialism to capitalism. The trend is particular apparent in the young: another Gallup poll showed that as recently as 2010, 68% of people between 18 and 29 approved of capitalism, with only 51% approving of socialism, whereas in 2018, while the percentage among this age group favoring socialism was unchanged at 51%, those in favor of capitalism had dropped precipitously to 45%. The same poll showed that among Democrats, the popularity of socialism now stands at 57%, while capitalism is only at 47%, a marked departure from 2010 when the two were tried at 53%. A YouGov poll from earlier this year showed that unlike older generations, which still preferred capitalist candidates, 70% of millennials and 64% of gen-Zers would vote for a socialist.

The question is why socialism now? At a time when the American economy under Trump seems to be chugging along at a nice clip, why are so many hankering for an alternative? I would suggest four factors contributing to the situation.

Factor #1: Ignorance of History

The first cause of socialism’s popularity, especially among the young, is an obvious one: having grown up at a time after the end of the Cold War, the collapse of Europe’s Eastern Bloc and China’s transition to authoritarian capitalism, “these kids today” — those 18 to 29 year-olds who were born around the last decade of the 20^th century — don’t know what socialism is all about. When they think socialism, they don’t think Stalin; they think Scandinavia.

Americans’ — and especially young Americans’ — ignorance of history is well-documented and profound. As of 2018, only one in three Americans could pass a basic citizenship test , and of test-takers under the age of 45, that number dropped to 19%. That included such lowlights as having no clue why American colonists fought the British and believing that Dwight Eisenhower led the troops during the Civil War. Speaking of the war during which he actually led the troops, many millennials don’t know much about that one either. They don’t know what Auschwitz was (66% of millennials in particular could not identify it). Twenty-two percent of them had not heard of the Holocaust itself. The Battle of the Bulge? Forget it. Go back further in time, and the cluelessness just keeps deepening. Only 29% of seniors at U.S. News and World Report’s top 50 colleges in America — the precise demographic that purports to speak with authority about America’s alleged history of white supremacy — have any idea what Reconstruction was all about. Only 23% know who wrote the Constitution. So much for any notion that this is the most educated generation ever.

Closer to the theme — socialism — the same compilation of survey results includes the attribution of The Communist Manifesto’s “from each according to his ability; to each according to his needs” to Thomas Paine, George Washington or Barrack Obama. Moreover, among college-aged Americans, though support for socialism is pretty high, when these same young adults are asked about their support for the actual definition of socialism — a government-managed economy — 72% turn out to be for a free-market economy and only 49% for the government-managed alternative (yes, it looks from those numbers like there are a lot of confused kids who are in favor of both of the mutually exclusive alternatives). As compared to about a third of Americans over 30, only 16% of millennials were able to define socialism, according to a 2010 CBS/New York Times poll. And though I haven’t seen polling on this, I’d be willing to bet that a good bunch of these same students, if asked to say what the Soviet Union was, would have no clue or peg it as some sort of vanquished competitor of Western Union.

Compounding the problem still further is that the history that students are being taught increasingly falls into the category of “woke” history , America’s history of oppression as imagined by the influential revisionist socialist historian Howard Zinn . When socialists are writing our history books, the end result is preordained.

Given such ignorance and systematic distortion of history, is it any surprise that millennials who never lived through very much of the 20 ^th century don’t think socialism is all that bad?

Factor #2: Government Bungling

When we try to explain the socialist urge, we cannot lose sight of the fact that our government keeps interfering in the economy in ways that give people every reason to think the system is corrupt and needs to be trashed.

Take the skyrocketing cost of college, for instance. On the surface, this looks like greedy capitalist universities just keep on raising tuition, and since most college kids and their parents can’t pay the sticker price, almost 70% take out loans , saddling young people trying to start their careers with a mountain of debt (almost $30,000 on average). This results in all those socialist promises of free college or loan forgiveness sounding dandy. Underneath the surface, however, a huge part of the problem is federal grants and subsidized loans. If the government stopped footing a large part of their bill, more students and parents would be forced to pony up, which would mean, in turn, that colleges would not be able to keep hiking their prices without seeing a precipitous drop in enrollment. They would, instead, be forced to price themselves at some level that applicants could realistically pay, making college more affordable for a large segment of the American middle class.

Another simple example of the problem is Obama’s Emergency Economy Stabilization Act of 2008, colloquially known as the big bank “Bailout.” When kids grow up seeing government tossing out free lifelines to businesses that get themselves in dire straits, cause a massive financial crisis and, in the process, lose ordinary folks lots of jobs and homes, we can’t blame them for concluding that the system is rigged.

There are many more examples where these came from — our government frittering away trillions on foreign wars that increase instability throughout the world and end up costing us even more as we scramble to clean up our own messes is one expenditure that comes readily to mind — but the point is this: the more the government interferes in the economy to help out vested interests, the more reason many of us will see to ask government to interfere in the economy to help out the rest of us. The more reason we give anyone to think that capitalism means crony capitalism, the more they’ll clamor for socialism.

Factor #3: Universities’ Ideological Monoculture

The supporters of socialism are not simply the young, but rather, disproportionately those among the young who are college-educated. And the more college they have, the hotter for socialism they get. According to a 2015 poll , support for socialism grows from 48% among those with a high school diploma or less to 62% among college graduates to 78% among those with post-graduate degrees. Those on the left probably stop thinking hard about now and jump immediately to the conclusion that support for socialism is just a natural outgrowth of big brains and elite educations. But there is, in fact, a less obvious but ultimately far more compelling explanation that also manages to account for the general fact that more education correlates with more leftism: something — something bad — is happening at universities themselves to pull students toward the (far) left.

We have already seen above that what’s not happening at universities, even elite universities, today is a whole lot of education in important subjects like history. What we are getting instead is a lot of groupthink and indoctrination. Universities have always skewed a bit left. But beginning in the early to mid 1990s (for reasons I’ve explained in some detail elsewhere ), ideological diversity began to vanish entirely, as the leftward deviation turned tidal. As documented in a 2005 paper from Stanley Rothman et al., as of 1984, 39% of university faculty were left/liberal, and 34% were right/conservative. By 1999, those numbers had undergone a seismic shift: faculty was now 72% left/liberal and 15% right/conservative. Since 1999, the imbalance has become starker still. A comprehensive National Association of Scholars report from April 2018 from Prof. Mitchell Langbert of Brooklyn College, tracking the political registrations of 8,688 tenure-track, Ph.D.-holding professors from 51 of U.S. News & World Report’s 66 top-ranked liberal arts colleges for 2017, found that “78.2 percent of the academic departments in [his] sample have either zero Republicans, or so few as to make no difference.” Predictably, given the composition of the professoriate, survey data also indicates that students’ political views drift further leftward between freshman and senior year.

In light of this data, it should not be a surprise to us that students who have gone to college in this age of ideological extremism have come out radicalized and … socialized.

Factor #4: Coddled Kids

The young have always been more inclined to embrace pipe dreams — a lack of familiarity with the complicated way in which the world actually works, coupled with the college fix described above, will do that to most anyone — but there is a reason the mindset of today’s young’uns is particularly susceptible to the red menace. In last year’s The Coddling of the American Mind, the prominent social psychologist Jonathan Haidt and FIRE’s Greg Lukianoff describe the species of overprotective parenting and instilling of baseless and uncritical self-esteem by parents and educators alike that came to prevail as kids were growing up in the 90s and 00s. When we are raised in the belief we are wonderful just as we are, we never learn the critical life skills of self-soothing, working through anxiety, facing obstacles and overcoming adversity. The predictable result, as Haidt and Lukianoff observe, is a demand to be safeguarded — safe spaces, free speech crackdowns and so on. The state appears to many as the appropriate institution to provide this sort of “safety.”

If these four are the primary causes of socialism’s rapid surge in our midst, then the next logical question is what to do about it. There is no easy answer, of course, but I would suggest that the radicalization of academia is the lynchpin issue. If we could succeed in reversing that tsunami, many dominoes would fall: we would be addressing the university monoculture that systematically distorts research, sends students veering hard left and graduates generations of left-orthodox clones who find their way into journalism, government, education, entertainment and other influential sectors driving public opinion and shaping the other three downstream issues factoring into socialism’s rise: government policy, educational philosophy and the manner in which history is taught. Many have observed that our universities are in crisis, but that crisis also represents an opportunity to avert the much larger socialist cataclysm that threatens to engulf us all.

Ocasio-Cortez is Wrong: We're Not Working 80-Hour Weeks Now

Ryan McMaken — Thu, 07 Nov 2019 17:15:00 -0600

It has become nearly commonplace for pundits and politicians to claim that Americans are working more than ever before; that they're working more jobs, and working longer hours — all for a lower income.

During the Democratic debates this summer, for instance, Rep. Tim Ryan of Ohio claimed "the economic system now force[s] us to have two or three jobs just to get by.” Kamala Harris made similar comments.

These claims echo statements from Elizabeth Warren in Alexandria Ocasio-Cortez. In a July 2018 interview, Ocasio-Cortez insisted "Unemployment is low because everyone has two jobs. Unemployment is low because people are working 60, 70, 80 hours a week and can barely feed their family." That same month, Warren stated "people" are "working two, three, or four jobs to try to pay the rent and keep food on the table."

Ocasio-Cortez was the only one in this group unwise enough to claim "everyone" is working incredibly long hours, but the general sentiment is clear enough: a lot of people are working harder and longer just to attain even a basic standard of living.1

Fortunately, this doesn't appear to be the case at all. While it is no doubt true that some people work multiple jobs, and many work long hours, it is not clear that this situation is new, or that it has become worse in the past decade.

In fact, in response to Harris's comments, The Washington Post reported that the number of working Americans with more than one job is lower now than the mid-90s:

In all, there are 7.8 million people who hold more than one job — just 5 percent of Americans with jobs . The percentage has been roughly steady since the Great Recession, and in fact is lower than in the mid-1990s, when it hovered around 6 percent.

Nor can we guess from the data as to why people were working more hours or working more than one job.

It cannot be just assumed that people work more only because they risk hunger and eviction from their homes, without those extra hours. After all, there is a growing body of research showing that it is high-income workers who are most prone to working longer hours. For example, according to one study, the authors found

Between 1979 and 2002, the frequency of long work hours increased by 14.4 percentage points among the top quintile of wage earners, but fell by 6.7 percentage points in the lowest quintile.

When we see evidence of rising work hours, it's often a safe guess that among those working more are many higher-wage workers. These people are not working "60, 70, 80 hours a week" to "keep food on the table."

This reverses the status quo of the past (i.e., the 1970s and before) when lower-income workers tended to work more. But, in a 2006 study, economists Mark Aguiar and Erik Hurst studied work and leisure trends over the last 40 years.

They noticed that, in the 1960s, most men—regardless of their education, which serves as a proxy for income—worked the same amount of hours, about 50 per week, and spent about 105 hours dedicated to leisure activities. By 2003, a divergence emerged that mirrored growing income inequality: Men with less than 12 years of education worked, on average, 37.5 hours a week, while more educated (higher earning) men worked 43.4 hours. Both groups gained more leisure time (socializing, watching TV, playing sports), though the less educated group spent about 6 to 7 more hours a week engaged in leisure activities than their more educated (and presumably higher earning) peers.

This, incidentally, has increased measures of income inequality overall. Higher income workers are electing to work more, while middle-and lower income workers opt for leisure. Since government measures of money income can't take into account the benefits of leisure, we then see an increased difference between the two groups.

Another complicating factor is the fact many workers choose to work more when the economy is doing well. Thus, during periods of significant income gains, we might also see increases in working hours.

Using numbers from the University of Groningen, we can see these trends at work in recent decades:

Overall, annual working hours have declined in recent decades, although we do find that working hours increased — with some ups and downs — from the early 80s to the end of the Dot-Com boom in 2000. This was also a period during which median incomes increased sizably for most groups. The direction of causality probably goes both ways. As job opportunities grew during this time, many people took advantage of the situation and worked longer hours when they could, so as to increase purchasing power and their standards of living. As a result, both personal and household incomes went up. We can see how working hours tend to track with the business cycle using a the Bureau of Labor Statistics' numbers for average weekly hours:

It should not be assumed that most people were working longer hours simply because they were headed toward the poverty line. Nor can it be assumed workers prefer leisure to additional consumption. One example which suggests the American preference for consumption over leisure is the fact the size of American houses have increased in recent decades even as household sizes have decreased. Presumably a declining household size implies square-footage needs also decline. Yet, many Americans continue to opt for more spacious living quarters, which drives a greater need for more money income, and often longer hours.

Yet, even as working hours have remained largely flat over the past generation, example, real incomes have increased. From 1980 to 2017, the median income increased 14 percent for men, and 24 percent for women. But using weekly average hours numbers from the Bureau of Labor Statistics, weekly average hours increased only 0.5 percent over the same period from 38.5 hours to 38.7 hours.

Since the end of the Dot-Com boom in 2000, of course, median incomes have largely flattened. There was no change at all for men from 2000 to 2017, while the increase for women was 12 percent. But during that time, average weekly hours fell 0.5 percent for women, and fell 3.7 percent for men. Government income statistics, however, measure only money income, so the increased leisure is measured as zero income.

The Larger Trend

Overall, working hours haven't moved much in the past forty years — although incomes have increased significantly over that period. But, working hours are still well down from where they were during the first half of the twentieth century — at least for full-time workers. Weekly work hours plummeted from 60 per week in 1890 to 40.25 in 2000, according to calculations by Michael Huberman and Chris Minns.2 Civilian working hours collapsed between 1929 and 1950 due to the great depression and the Second World War, but averages have rarely exceeded 40 hours ever since.

Researchers Valerie A. Ramey and Neville Francis, on the other hand, contend this drop-off is overstated, and they opt for a different method that shows a decrease of only 16 percent between 1900 and 2005, dropping from 27.7 hours to 23 hours worked per person. (The real median income likely quadrupled during this period.)

But even the more modest gains showed by Ramey and Francis point to broad declines in work time. For example, since 1900, weekly work hours for children in the 10 to 13-year-old range decreased from 5.2 hours per week to zero hours per week in every year since 1940. Weekly work by teenagers (ages 14-17) has also collapsed, dropping from 20 hours per week in 1900 to 2.9 hours in 2005. Meanwhile, Americans are clearly retiring earlier since weekly work in the over-65 population fell from 19.3 weekly hours in 1900 down to 4.2 weekly hours in 2005.3

This gains appear to have been made possibly by the continued labor of workers in the 25-54 subset. Accoridng to Ramey and Francis, these workers have not seen any decline in total hours since 1900, although their standard of living has certainly increased. From 1900 to 2005, weekly hours for the 25-54 year olds increased from 29.6 to 31.3.

Women in the Workforce

This increase, however, has been largely fueled by women joining the workforce. Weekly hours worked by males — even in the 24-54 group — declined by 25 percent during the twentieth century, and remains down from the alleged "good ol' days" of the 1950s and 1960s. Declines in working hours for males were even larger in all other age groups.

For women, however, weekly hours worked increased substantially, but mostly for women in the 25-64 range. For women aged 25-54, weekly hours increased from 7.9 in 1900 to 26.1 in 2005.

Seeing this, some bearish observers of American standards of living often claim that everyone is really working much more because prior to the 1970s, women didn't "have to" work. These critics claim that as manufacturing and other presumably high-wage jobs went into decline, women were forced to get wage work to make up the difference.

The problem with this claim, however, is that as women began to join the workforce in larger numbers during the 1950s and 1960s, this did not represent a shift from leisure to work. It only represented a shift from "home production," to production through wage work.4 Thanks to a variety of labor-saving devices, expanded schooling for children, and the introduction of part-time work, women were able to seek money income for themselves and their families without reducing overall leisure time.

For example, for all women over age 14, the reduction in home production was larger than the increase in "hours worked," leaving more time that could be devoted either to leisure or schooling: From 1900 to 2005, home production for women fell from 42.5 hours to 27.6 hours. That's a drop of 14.9 hours. Meanwhile, "hours worked" increased by only 9.3 hours.

Meanwhile, weekly time spent on home production overall — including both men and women — declined for all age groups except the over-65 group.

As home production and working hours declined, this left more time for leisure and schooling. Thus, Ramey and Francis conclude that even with sizable increases in schooling in recent decades, leisure time increased across all age groups from 1900 to 2005, for men and women combined. The largest gains, not surprisingly, are found with the over-65 age group.

Moreover, with growing leisure in the over-65 cohort, combined with growing life expectancies, lifetime leisure howas now reached the highest level it's ever been. Ramey and Francis calculate "cumulative lifetime hours of leisure" increased by 11 percent from 1970 to 2000.

Given that working hours as of 2017 were still lower than they were in 2000, it is likely that time devoted to leisure and schooling has increased since then, especially as the population ages and more Americans retire.

1. The minimum necessary standard of living necessary to qualify as "decent" or "basic" is never defined.
2. Michael Huberman and Chris Minns, "The times they are not changin’: Days and hoursof work in Old and New Worlds, 1870–2000." Explorations in Economic History, 44 (2007) 538–567. July 2007.
3. Valerie A. Ramey and Neville Francis, "A Century of Work and Leisure, " American Economic Journal: Macroeconomics 2009, 1:2, 189–224.
4. In other words, leisure didn't necessarily decline as women entered the workforce. Women simply opted to do different types of work, often because wage work offered more monetary rewards than home production. (Home production includes food preparation, child care, shopping for goods and services, home maintenance, and laundry. This work was overwhelmingly done by women prior to the 1960s.)

The Problem of Poverty

Henry Hazlitt — Thu, 07 Nov 2019 14:00:00 -0600

[Chapter One of The Conquest of Poverty.]

The history of poverty is almost the history of mankind. The ancient writers have left us few specific accounts of it. They took it for granted. Poverty was the normal lot.The ancient world of Greece and Rome, as modern historians reconstruct it, was a world where houses had no chimneys, and rooms, heated in cold weather by a fire on a hearth or a fire-pan in the center of the room, were filled with smoke whenever a fire was started,and consequently walls, ceiling, and furniture were blackened and more or less covered by soot at all times; where light was supplied by smoky oil lamps which, like the houses in which they were used, had no chimneys; and where eye trouble as a result of all this smoke was general. Greek dwellings had no heat in winter, no adequate sanitary arrangements, and no washing facilities.1

Above all there was hunger and famine, so chronic that only the worst examples were recorded. We learn from the Bible how Joseph advised the pharaohs on famine relief measures in ancient Egypt. In a famine in Rome in 436 B.C., thousands of starving people threw themselves into the Tiber.

Conditions in the Middle Ages were no better:

The dwellings of medieval laborers were hovels -- the walls made of a few boards cemented with mud and leaves. Rushes and reeds or heather made the thatch for the roof. Inside the houses there was a single room, or in some cases two rooms, not plastered and without floor, ceiling, chimney, fireplace or bed, and here the owner, his family and his animals lived and died. There was no sewage for the houses, no drainage, except surface drainage for the streets, no water supply beyond that provided by the town pump, and no knowledge of the simplest forms of sanitation. 'Rye and oats furnished the bread and drink of the great body of the people of Europe. ... Precariousness of livelihood, alternations between feasting and starvation, droughts,scarcities, famines, crime, violence, murrains, scurvy, leprosy, typhoid diseases, wars, pestilences and plagues ' -- made part of medieval life to a degree with which we are wholly unacquainted in the Western world of the present day.2

And, ever-recurring, there was famine:

In the eleventh and twelfth centuries famine [in England] is recorded every fourteen years, on an average, and the people suffered twenty years of famine in two hundred years. In the thirteenth century the list exhibits the same proportion of famine; the addition of high prices made the proportion greater.Upon the whole, scarcities decreased during the three following centuries; but the average from 1201 to 1600 is the same, namely, seven famines and ten years of famine in a century.3

One writer has compiled a detailed summary of twenty-two famines in the thirteenth century in the British Isles, with such typical entries as: "1235: Famine and plague in England; 20,000 persons die in London; people eat horse-flesh, bark of trees, grass, etc."4

But recurrent starvation runs through the whole of human history. The Encyclopedia Britannica lists thirty-one major famines from ancient times down to 1960.5 Let us look first at those from the Middle Ages to the end of the eighteenth century:

1005: famine in England. 1016: famine throughout Europe. 1064-72: seven years' famine in Egypt. 1148-59: eleven years' famine in India. 1344-45: great famine in India. 1396-1407: the Durga Devi famine in India, lasting twelve years. 1586: famine in England giving rise to the Poor Law system. 1661: famine in India; no rain fell for two years.1769-70: great famine in Bengal; a third of the population -- 10 million persons -- perished. 1783: the Chalisa famine in India. 1790-92: the Deju Bara, or skull famine, in India, so called because the dead were too numerous to be buried.

This list is incomplete -- as probably any list would be. In the winter of 1709, for example, in France, more than a million persons, according to the figures of the time,died out of a population of 20 millions.6 In the eighteenth century, in fact, France suffered eight famines, culminating in the short crops of 1788, which were one of the causes of the Revolution.

I am sorry to be dwelling in such detail on so much human misery. I do so only because mass starvation is the most obvious and intense form of poverty, and this chronicle is needed to remind us of the appalling dimensions and persistence of the evil.

In 1798, a young English country parson, Thomas R. Malthus, delving into this sad history, anonymously published an Essay on the Principles of Population as it affects the Future Improvement of Society . His central doctrine was that there is a constant tendency for population to outgrow food supply and production. Unless checked by self-restraint, population will always expand to the limit of subsistence, and will be held there by disease, war, and ultimately famine. Malthus was an economic pessimist, viewing poverty as man's inescapable lot. He influenced Ricardo and other classical economists of his time, and the general tone of their writings led Carlyle to denounce political economy as "the Dismal Science."

Malthus had in fact uncovered a truth of epoch-making importance. His work first set Charles Darwin on the chain of reasoning which led to the promulgation of the theory of evolution by natural selection. But Malthus greatly overstated his case, and neglected to make essential qualifications. He failed to see that, once men in any place (it happened to be his own England) succeeded in earning and saving a little surplus, made even a moderate capital accumulation, and lived in an era of political freedom and protection for property, their liberated industry, thought, and invention could at last make it possible for them enormously and acceleratively to multiply per capita production beyond anything achieved or dreamed of in the past. Malthus announced his pessimistic conclusions just in the era when they were about to be falsified.

The Industrial Revolution

The Industrial Revolution had begun, but nobody had yet recognized or named it. One of the consequences of the increased production it led to was to make possible an unparalleled increase in population. The population of England and Wales in 1700 is estimated to have been about 5,500,000; by 1750 it had reached some 6,500,000. When the first census was taken in 1801 it was 9,000,000; by 1831 it had reached 14,000,000. In the second half of the eighteenth century population had thus increased by 40 percent, and in the first three decades of the nineteenth century by more than 50 percent. This was not the result of any marked change in the birth rate, but of an almost continuous fall in the death rate. People were now producing the food supply and other means to support a greater number of them.7

This accelerating growth in population continued. The enormous forward spurt of the world's population in the nineteenth century was unprecedented in human experience. "In one century, humanity added much more to its total volume than it had been able to ad d during the previous million years."8

But we are getting ahead of our story. We are here concerned with the long history of human poverty and starvation, rather than with the short history of how mankind began to emerge from it. Let us come back to the chronicle of famines, this time from the beginning of the nineteenth century:

1838: intense famine in North-Western Provinces (Uttar Pradesh), India; 800,000 perished. 1846-47 famine in Ireland, resulting from the failure of the potato crop. 1861:famine in northwest India. 1866: famine in Bengal and Orissa; 1,000,000 perished. 1869:intense famine in Raiputana; 1,500,000 perished. 1874: famine in Bihar, India. 1876-78:famine in Bombay, Madras, and Mysore; 5,000,000 perished. 1877-78: famine in north China; 9,500,000 said to have perished. 1887-89: famine in China. 1891-92: famine in Russia. 1897: famine in India; 1,000,000 perished. 1905: famine in Russia. 1916: famine in China. 1921: famine in the U.S.S.R., brought on by Communist economic policies; at least 10,000,000 persons seemed doomed to die, until the American Relief Administration, headed by Herbert Hoover, came in and reduced direct deaths to about 500,000. 1932-33: famine again in the U.S.S.R., brought on by Stalin's farm collectivization policies; "millions of deaths."

1943: famine in Bengal; about 1,500,000 perished. 1960-61: famine in the Congo.9

We can bring this dismal history down to date by mentioning the famines in recent years in Communist China and the war-created famine of 1968-70 in Biafra.

The record of famines since the end of the eighteenth century does, however, reveal one striking difference from the record up to that point. Mass starvation did not fall on a single country in the now industrialized Western world. (The sole exception is the potato famine in Ireland; and even that is a doubtful exception because the Industrial Revolution had barely touched mid-nineteenth-century Ireland -- still a one-crop agricultural country.)

It is not that there have ceased to be droughts, pests, plant diseases, and crop failures in the modern Western world, but that when they occur there is no famine, because the stricken countries are quickly able to import foodstuffs from abroad, not only because the modern means of transport exist, but because, out of their industrial production, these countries have the means to pay for such foodstuffs.In the Western world today, in other words, poverty and hunger -- until the mid-eighteenth century the normal condition of mankind -- have been reduced to a residual problem affecting only a minority; and that minority is being steadily reduced.But the poverty and hunger still prevailing in the rest of the world -- in most of Asia,Central and South America, and Africa -- in short, even now afflicting the great majority of mankind -- show the terrible dimensions of the problem still to be solved. And what has happened and is still happening in many countries today serves to warn us how fatally easy it is to destroy all the economic progress that has already been achieved. Foolish governmental interference led the Argentine, once the world's principal producer and exporter of beef, to forbid in 1971 even domestic consumption of beef on alternate weeks.Soviet Russia, one of whose chief economic problems before it was communized was to find an export market for its huge surplus of grains, has been forced to import grains from the capitalist countries. One could go on to cite scores of other examples, with ruinous consequences, all brought on by short-sighted governmental policies.

More than thirty years ago, E. Parmalee Prentice was pointing out that mankind has been rescued from a world of want so quickly that the sons do not know how their fathers lived:

"Here, indeed, is an explanation of the dissatisfaction with conditions of life so often expressed, since men who never knew want such as that in which the world lived during many by-gone centuries, are unable to value at its true worth such abundance as now exists, and are unhappy because it is not greater."10

How prophetic of the attitude of rebellious youth in the 1970s! The great present danger is that impatience and ignorance may combine to destroy in a single generation the progress that it took untold generations of mankind to achieve.

Those who cannot remember the past are condemned to repeat it.

1. E. Parmalee Prentice, Hunger and History, Harper & Bros., 1939, pp.39-40.
2. Ibid., pp.15-16.
3. William Farr, "The Influence of Scarcities and of the High Prices of Wheat on the Mortality of the People of England," Journal of the Royal Statistical Society, February 16,1846, Vol. IX, p.158.
4. Cornelius Walford, "The Famines of the World," Journal of the Royal Statistical Society, March 19, 1878, Vol.41, p.433.
5. "Famine," Encyclopedia Britannica, 1965.
6. Gaston Bouthoul, La population dans Ia monde, pp. 142-43
7. T. S. Ashton, The Industrial Revolution (1760-1830), Oxford University Press, 1948,pp.3-4.
8. Henry Pratt Fairchild, "When Population Levels Off," Harper's Magazine, May, 1938,vol.176, p.596.
9. "Famine" and "Russia," Encyclopedia Britannica, 1965
10. Hunger and History, p.236.

The Economics Behind the Fall of the Berlin Wall

Ryan McMaken — Thu, 07 Nov 2019 11:00:00 -0600

Friday marks the thirtieth anniversary of the fall of the Berlin Wall. Like most historical events that are commemorated as if they took place on a single day, the fall of the Berlin Wall on November 9, 1989, was just one of many interrelated events that led to the end of the system of Soviet client states in Eastern Europe, and the end of the Soviet Union itself, in December of 1991.

With the fall of the Berlin Wall, East Germans, who had lived under severe restrictions on travel and emigration, were able to freely travel to West Berlin, which continued a chain of events already begun earlier that year in which many anti-Soviet dissidents throughout Eastern Europe became emboldened and met with unprecedented success. Meanwhile, East Germans flooded into neighboring countries by the thousands, seeking refuge from Soviet-sponsored oppression in Austria and West Germany.

Why It Was Different in 1989

Throughout the mid-twentieth century, Eastern Europe was home to numerous anti-Soviet revolts and acts of civil disobedience. In Hungary in 1956, Prague in 1968, and especially in Poland throughout the 1970s and 1980s, resistance flared up, but was reliably crushed with Soviet-sponsored martial law and outright military intervention.

But in the summer of 1989, the Poles held an election that essentially overthrew the Soviet-approved regime in Poland. This, time, however, instead of sending tanks to crush the Polish agitators, the USSR did nothing.

By November of that year, dissidents had become emboldened by Soviet inaction. Hungary and Czechoslovakia haphazardly opened their borders, allowing East Germans to stream into Austria and on to West Germany. East Berliners began to demand free passage to the West. The “fall” of the wall, soon followed.

Americans today, and especially American conservatives, like to claim that the end of the Soviet bloc and the Soviet Union was America’s doing; that the Soviet oligarchs feared American military might, and simply decided to give up and vote themselves out of existence, as they did two years later. This tale makes for nice domestic propaganda in America, but the fact that regimes virtually never just “give up” without firing a shot when faced with a threatening foreign power makes it rather unlikely.

We are far more likely to find an answer if we ask ourselves not why the American state was so strong in the 1980s, but why the Soviet state was so weak. If the Soviets were more than capable of maintaining “order” in Eastern Europe during the 50s, 60s, and 70s, why was it unable or unwilling to do the same in the 1980s?

An inquiry along these lines quickly leads us to find that by the 1980s, the soviet economy, and most of the economies of Eastern Europe were economic basket cases. Housing was in disrepair. Vehicles and appliances were incredibly old-fashioned and unreliable. The standard of living was a fraction of what it was in the “West.” Basic items like soap and women’s pantyhose were often luxuries.

In other words, the centrally-planned economies of the Soviet bloc produced little actual wealth, and as the regimes siphoned off more and more of what little wealth was being produced, the people, as well as the regimes, became poorer and poorer.

This economic weakness meant not only that the legitimacy of the regime was imperiled, but that the Soviets no longer enjoyed a military “surplus” with which they could simply roll into every rebellious neighborhood and re-establish order.

In other words, the USSR was too poor to pay the political bills.

Mises and the Calculation Problem

None of this would have surprised Ludwig von Mises. Decades before, Mises had shown that a socialist economy (by which he meant a centrally planned economy) could not possibly know what to produce, when to produce it, or for whom to produce. In explaining this, Mises proved that the Soviet Union, regardless of any victories it might have in remolding human nature, was economically impossible. Rothbard explains:

Before Ludwig von Mises raised the calculation problem in his celebrated article in 1920, everyone, socialists and non-socialists alike, had long realized that socialism suffered from an incentive problem. If, for example, everyone under socialism were to receive an equal income, or, in another variant, everyone was supposed to produce “according to his ability” but receive “according to his needs,” then, to sum it up in the famous question: Who, under socialism, will take out the garbage? That is, what will be the incentive to do the grubby jobs, and, furthermore, to do them well? ...

But the uniqueness and the crucial importance of Mises’s challenge to socialism is that it was totally unrelated to the well-known incentive problem. Mises in effect said: All right, suppose that the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, the socialist planners. What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient?

Mises demonstrated that, in any economy more complex than the Crusoe or primitive family level, the socialist planning board would simply not know what to do, or how to answer any of these vital questions. Developing the momentous concept of calculation, Mises pointed out that the planning board could not answer these questions because socialism would lack the indispensable tool that private entrepreneurs use to appraise and calculate: the existence of a market in the means of production, a market that brings about money prices based on genuine profit-seeking exchanges by private owners of these means of production. Since the very essence of socialism is collective ownership of the means of production, the planning board would not be able to plan, or to make any sort of rational economic decisions. Its decisions would necessarily be completely arbitrary and chaotic, and therefore the existence of a socialist planned economy is literally “impossible” (to use a term long ridiculed by Mises’s critics).

The Soviet central planners never had an answer to this critique. Indeed, their “answer” only came in 1991 when the USSR finally shut itself down. And even up to the end, American Keynesians never figured it out either, and Paul Samuelson still claiming in 1989 that a “socialist command economy can function and even thrive.”

Why Did it Take So Long?

In response to Mises’s claim of the impossibility of central planning, some then ask “well, if central planning was impossible, why did it last so long?”

The answer can be found in the fact that even in a centrally planned state, capital does not simply vanish overnight. The soviet planners were not starting with nothing. They had the accumulated capital of centuries of savings and investment by Russians, Ukrainians, Germans, Poles, and others under their control.

True, it was not possible for them to correctly plan or determine non-arbitrarily what goods should be produced. But they nevertheless had large amounts of capital at their disposal, and even if the centrally planned state produced zero wealth (which was not true since even the Soviet state produced some things people wanted), the state still had plenty of wealth to redistribute until it was all gone.

This is all the more true for regimes that are only partly centrally planned, as in the case of Venezuela, on which Nicolás Cachanosky observed:

[I]f one of the wealthiest and developed countries in the world were to adopt Cuban or North Korean institutions overnight ... [t]he wealth and capital does not vanish in 24 hours. The country would shift from capital accumulation to capital consumption and it might take years or even decades to drain the coffers of previously accumulated wealth. In the meantime, the government has the resources to ... enjoy the wealth, highways, electrical infrastructure, and communication networks that were the result of the more free-market institutional realities of the past.

Eventually, though, the “reserve fund,” as Mises called it, is used up:

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

In addition to this, the Soviets made money for the regime by selling oil (and other goods) in international markets, and high oil prices in the 1970s propped up the regime so well, that had it not been for Soviet oil sales, it’s quite possible the regime would have collapsed a decade earlier.

Conclusion

As the mainstream news outlets cover the anniversary of the Berlin Wall’s fall this year, they will surely spend much time discussing the role of various American politicians, and military programs, and international relations. It is quite possible that all of these things had an effect on the regimes of Eastern Europe that were non-trivial. Nonetheless, such analysis ignores the huge elephant in the room which is the inevitable failure of regimes that are built on central planning and wealth re-distribution. Without markets and prices, there can be no planning, and without planning, no wealth creation, and ultimately, no political durability. The rebels and demonstrators of Eastern Europe deserve immense credit for courageously standing up to the state. But in the end, those who were successful were helped immensely by good timing and bad economics.

[Editor's Note: This article was first published in 2014 to mark the 25th anniversary of the fall of the Berlin Wall. It has been slightly updated for the 30th anniversary.]

As Gun Owners Look to Nullify Gun Laws, "Sanctuary" Isn't Just for Immigrants

José Niño — Thu, 07 Nov 2019 11:00:00 -0600

Since President Donald Trump won in 2016, people were led to believe that the Trump administration would be one of the most pro-gun administrations ever . However, a bump stock ban courtesy of the ATF and the passage of Fix-NICS legislation has disappointed gun owners who believed Trump would make at least some marginal pro-gun reforms. To Trump’s credit, he is reportedly resisting the temptation of pushing “red flag” gun confiscation legislation — for the time being.

Not surprisingly, the real progress has been at lower levels of government, where local activists and policymakers have managed to expand laissez faire on the matter of private self defense. For starters, constitutional carry has had unexpected success in 2019, with states like Oklahoma , South Dakota , and Kentucky making it law in their respective jurisdictions. This continues a decades-long trend in which state governments have scaled back gun regulations.

Even more interesting are the county nullification efforts taking place across the country. What started out as Second Amendment Preservation Ordinances in rural Oregon counties tired of gun control coming from Salem, has turned into a nationwide movement of local government officials and their supporters. From Oregon to Rhode Island , counties and municipalities have announced they will not enforce various state and federal fun laws.

[RELATED: " Make Every State a Sanctuary State " by Ryan McMaken ]

From the looks of it, it some of America’s smaller states with Democratic-controlled legislatures are witnessing a rural uprising. But it would be a mistake to believe only small and medium-sized states are joining in the gun control nullification fun. In fact, there is evidence these nullification movements are going beyond Democratic and Republican politics. States like California and Texas are joining in the fray by passing their own gun sanctuary resolutions. The small town of Needles, California got the ball rolling in July by becoming a gun rights sanctuary. California is already ranked at an abysmally low 46^th place for “best states for gun owners” according to Guns & Ammo magazine . Considering its state politics, it makes more sense for gun owners to set up pro-self-defense enclaves in California’s rural areas.

Texas is also seeing an rising trend in support for gun sanctuaries. This is occurring as Texas is experiencing a changing political environment, where it may no longer be viable for bold pro-gun policies such as constitutional carry to be pursued at the state level. On top of that, an allegedly “pro-gun” Republican Lieutenant Governor Dan Patrick has entertained passing universal background check legislation.

Given these circumstances, Texas gun owners should throw in the towel, right?

Not so fast.

Recognizing that the state and the federal government won’t save them, gun activists have taken to rural counties to stand up against gun control. Since the border county of Presidio became a Second Amendment sanctuary in July, several other counties such as Hood county and Parker County in North Texas have passed sanctuary resolutions. The passage of gun sanctuaries in Texas are not isolated incidents, and due to the deeply-rooted gun culture in the state’s rural areas, more rural counties will likely follow. Even states like North Carolina are witnessing counties within their jurisdiction take the initiative on nullifying gun control.

There’s no question this entire process is a mess. Having a patchwork of Second Amendment zones across the state looks chaotic. But it’s a politically mature appraisal of the changing political and demographic trends that makes conventional political tactics obsolete. After all, America is a massive country, with a diverse political environment from state to state, and even within localities.

In turn, political operatives will have to adapt. Importantly, localist action changes people’s mindsets from relying on centralized and universalism-minded public administration. Some activists are re-learning how decentralized political systems (i.e., confederations and other federal systems) are supposed to work. They’re supposed to allow for — and even institutionalize — local opposition to political efforts by the central government. After all, local control allows for different jurisdictions to enact the sorts of laws that local residents support — regardless of what some politicians at the national capital might think.

Austrian Student Scholars Conference, Feb. 21-22, 2020

Jeffrey M. Herbener — Thu, 07 Nov 2019 08:30:00 -0600

Grove City College will host the sixteenth annual Austrian Student Scholars Conference, February 21-22, 2020. Open to undergraduates and graduate students in any academic discipline, the ASSC will bring together students from colleges and universities across the country and around the world to present their own research papers written in the tradition of the great Austrian School intellectuals such as Ludwig von Mises, F.A. Hayek, Murray Rothbard, and Hans Sennholz. Accepted papers will be presented in a regular conference format to an audience of students and faculty.

Keynote lectures will be delivered by Drs. T. Hunt Tooley and Christopher Coyne.

Cash prizes of $1,500, $1,000, and $500 will be awarded for the top three papers, respectively, as judged by a select panel of Grove City College faculty. Hotel accommodation will be provided to students who travel to the conference and limited stipends are available to cover travel expenses. Students should submit their proposals to present a paper to the director of the conference (herbenerjm@gcc.edu) by January 15. To be eligible for the cash prizes, finished papers should be submitted to the director by February 1.

Evidence-Based Economics: What the Doctor Ordered?

Michel Accad, Anish Koka, Peter G. Klein — Wed, 06 Nov 2019 14:15:00 -0600

Will the randomized control trial bring more clarity and certainty to economic science? Is “evidence-based economics” something to be hailed as a welcome innovation or should it be appraised with a more sober attitude? To examine this topic and discuss the relative place of randomized trials in economics and medicine we have as our guest Peter G. Klein, W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University’s Hankamer School of Business. Professor Klein is also the Carl Menger Research Fellow at the Mises Institute. He obtained his PhD in Economics from the University of California Berkeley, and his BA from the University of North Carolina Chapel Hill.

His field of interest is in the area of the economics of entrepreneurship and business organization. He taught previously at the University of California, Berkeley, the University of Georgia, the Copenhagen Business School, and the University of Missouri, and served as a Senior Economist with the Council of Economic Advisers. He is the author of five books and numerous peer-reviewed articles.

Family Formation, Fertility, and Failure: A Literature Review on Price Increases and Their Impact on the Family Institution

Jeffrey Degner — Wed, 06 Nov 2019 14:00:00 -0600

Quarterly Journal of Austrian Economics 22, no. 2 (Summer 2019) full issue.

ABSTRACT: Inflation not only debases the value of currency by lowering purchasing power. It also serves to erode the quantity and quality of marriages while creating distortions in the decision-making processes of those hoping to form marriages and to have children. Furthermore, a loss of purchasing power helps to create relational tension for married couples, contributing to increasing divorce rates throughout the globe. As for the formation of families via marriage, the literature surrounding inflation and the family shows that price increases in higher education and housing both limit the number of first marriages as well raising the average age at which they occur. These phenomena are present in Western democracies, Islamic theocratic regimes, and highly-developed East Asian economies. Rising prices impact already married couples who would pro-create, but decide to accelerate or nearly eliminate child-bearing based on the inflationary environment in which they live. Finally, the literature shows that a loss of purchasing power leads to marital tension and higher rates of divorce. This trend is exhibited all over the world. This relationship occurs across cultural and religious systems as well as differing levels of economic development. While the problem of rising prices is economic in nature, it is shown to have deleterious effects upon the family institution.

inflation family

JEL Classification: D10, E34

INTRODUCTION

At the centennial gathering of the American Economic Association, Dr. Gary Becker addressed those assembled and described a growing awareness of how macroeconomic forces affect the family institution. In his concluding remarks, he noted that the, “evolution of the economy greatly changes the structure and decisions of families.” (Becker 1988) The aim of this review is to summarize the literature that describes how a variety of rising prices impact family formation, fertility, and failure. Since family institutions exist throughout the varied cultures of the world, the review will observe the heterogeneity of inflation’s impact on the family across cultures and national borders.

There are two key distinctions that this writer wishes to articulate. The first is in regards to the philosophical framework and definition of the family institution. In my understanding of the role of family in society, I borrow from the Dutch Calvinist philosopher Abraham Kuyper (while rejecting his views on state intervention into various markets among other views). He describes the family as a divine creation. As such, this ‘sovereign sphere’ is an institution designed with its own rights, responsibilities, norms, roles, and limits. In addition, the family institution is not subject to the control of other institutions such as ruling authorities, religious institutions, or markets. While at the same time, the family social unit will freely interact with all of the other institutions without being absorbed by or otherwise diminished in its role as the primary way in which children are raised, educated, and socialized. In Kuyper’s view, the other divinely inspired institutions such as markets (for goods, services, money creation, and financial assets) and governing authorities also have their own divinely constructed purposes, jurisdiction, and limits.

Our world now represents what happens when mankind rejects the divine order and decides to merge the distinct spheres, regardless of the rationale for doing so. The most important example of such an ‘unholy marriage’ in our time occurs when the market for money creation is combined with the governing institution. In such instances both of these institutions have already stepped outside of their divinely-ordained spheres of operation. Furthermore, this new, man-made organization necessarily sets itself up against the other institutions that choose to retain their intended form and function. As such, this man-made entity will inevitably infringe on the proper operations of the other sovereign spheres. This viewpoint provides a narrative for the corrosive effects of modern central banking cartels upon the family institution. In Kuyper’s view, “surely, to centralize all power in the one central government is to violate the ordinances that God has given for nations and families. It destroys the natural divisions that give a nation vitality, and thus destroys the energy of the individual life-spheres and of the individual persons.” (Van Dyke 2015)

This observation is quite meaningful in our time as we observe both Central Bank inflation and the ‘deinstitutionalization’ (Cherlin 2004) of the family and of marriage throughout the world. Altered family structures and decisions are seen in the delay of family formation and by increasing divorce rates across the globe. Perhaps unwittingly, Cherlin affirmed that a growing disregard for Kuyper’s definition of the family institution has emerged in 20th century America for the very reasons that Kuyper describes. In light of this deinstitutionalization, this literature review seeks to describe how researchers have linked declining purchasing power to the crumbling institution of marriage.

The second point of clarification is that the writer of this review defines inflation as any increase in the supply of money and credit. I reject the notion of ‘inflation’ as an increase in government-measured price levels. In most cases, the literature does not adopt this writer’s definition. Therefore, when some writers refer to “inflation”, I will refer to “price increases”. The first reason for this clarification is based on Richard Cantillon’s observation that price increases are not simultaneous, universal, nor do they occur by the same degree in all places after monetary injections have occurred. (Murphy 1989) In addition, the writer discards the mainstream use of the term ‘inflation’ on the grounds that it is considered to be synonymous to the US Bureau of Labor Statistics’ Consumer Price Index. I reject the CPI and commonly used term ‘inflation’ precisely because it does not reflect the experience of rising prices within households, across income levels, races, or even genders. (Michael 1975, Hobijn and Lagakos 2003, Armantier et al. 2012, Sequino and Heintz 2012, Bryan and Venkatu 2002)

To provide an overview of the literature on family formation, I first begin with the economic theory of family formation articulated by Gary Becker. In 1974, he described marriage as a process of “Positive Assortive Mating” where potential spouses seek to improve their overall utility as compared to the utility held by remaining single. The existence of mate selection processes by no means requires one to dismiss marriage as a divinely created institution. The fact that men and women select partners to improve overall utility does not require that the institution is therefore simply a man-made institution. Just as a person may select a seat on a airplane based on their subjective values that account for prices, comfort and other factors does not mean that they are responsible for the construction of the plane or for the physical laws that govern its operation. Likewise, in mate-seeking, the desire to gain additional marginal utility in a state of marriage, potential partners consider factors such as IQ, education level, height, ethnicity and more, while not altering the fundamental design of marriage itself.

Recent scholarship has revealed that in the US, price increases and the ensuing distress borrowing by young people is positively correlated to the average age of first marriage. (Bosick and Estacion 2014, Gicheva 2016) To be more precise, education-based debt levels of the potential spouse have been shown to have a negative impact on the positive assortive mating that Becker describes. These high debt levels are associated with inflation in higher education tuition. However, these high debt levels are more consistent with the educational attainment of middle and upper middle-class American youths who can afford to delay the necessity of work.

Among these more affluent young people, it is obvious that not every couple wishes to live together or to have children. The literature shows that among those with higher incomes and higher levels of educational attainment, many couples avoid traditional marriage and choose to cohabitate simply because they have different costs in view than their poor counterparts. The literature affirms that these couples are waiting to reach financial milestones, not in terms of nominal cash holdings or income, but in terms of real asset and property accumulation. The achievement of such goals is made more difficult with a lack of purchasing power. (Smock et al. 2005) All told, the literature paints a picture wherein inflationary pressure across geographic, racial, and educational descriptors is linked to delayed marriage formation and non-formation in the case of cohabitating couples.

In the case of the poor in the US, rising prices for the goods that they consume have been shown to increase criminality among single males. Males who have resorted to more lucrative criminal activity and the incarceration that often ensues has, resulted in low marriageability status across cohorts in the United States. Another consequence of male criminality is that there are increasing levels of fatherless children throughout racial groups, as these men are viewed as reproductive partners, but not as traditional husbands or fathers. (Rosenfeld et al. 2018) This situation further erodes the family institution when coupled with the wage inflation that has been more prominent for females in the US, which leads many women (even those with low labor productivity) to eschew husbands as providers in exchange for provision from the state, their own wages, or older family members. (Schneider et al. 2018)

The presence of increasing prices has also been shown to impact the fertility rates of married couples over time and in different cultural and economic settings. Robert T. Michael observed that wealthy and poor households experience price increases differently in the modern US economy. Since this is the case, it follows that the poor and the wealthy would approach fertility decisions differently as well. (Michael 1979) This observation foreshadowed Caldwell’s work in international family economics, which asserted that families in low-income countries respond to price increases by growing the number of children they bring into the world. They decide to do so because their offspring represent net positive income flows and because the children can contribute to overall family wealth with their low-skilled labor. Conversely, in developed nations, the increasingly high price of educating children for modern economic life leads families to have fewer children, as each child produces negative income flows during their years under their parents’ roofs. (Caldwell 1983)

In more recent research, Kaplan suggested an update to Caldwell’s view by introducing different measures for ascertaining intergenerational wealth flows. Specifically, there is a call to recognize the fact that underdeveloped economies often measure wealth in terms of commodity acquisition rather than nominal monetary amounts. (Kaplan 1994) When considering the body of literature on how higher prices effects fertility, it is shown that a lack of wealth across time, culture, and economic standing all produce fertility rates that are distortions from a natural state of reproductive supply and demand within households. Ultimately, developed nations tend to have lower fertility rates, leading some to fall short of zero population growth, while developing nations still struggle with the challenges of young, booming populations. When families in these poor nations also experience price increases, fertility rates are also shown to increase. The literature also demonstrates that there is a negative relationship between price increases and fertility in developed nations.

Across the world, families also dissolve under the pressure of escalating prices. The literature examining US divorce rates since 1929 has shown that during periods of large price increases that there is a robustly positive relationship to marriage dissolution. (Nunley and Zietz 2012) This relationship was most powerfully illustrated throughout the 1960s and all the way through the Vietnam Era. The escalating prices caused by ‘Great Society’ legislation such as Medicare and Medicaid, coupled with the massive expenditures on the war in Vietnam both occurred during this period and represented a shift of real resources from American households to the welfare state and to war-making. These macroeconomic realities left the already married with a loss of purchasing power and all of the relational strains that come along with it. Some literature has asserted that this ongoing increase in the divorce rates in the US, and particularly the high divorce rates of the 1970s, were caused by the adoption of no-fault divorce law. (Peters 1993, Friedberg 1998, Rogers et al. 1999) However, Wolfers finds that while these changes in the legal environment did have an initially positive but weak correlation to divorce rates, these effects did not persist over time. (Wolfers 2006)

Meanwhile, in the UK, a similar conclusion was reached by research which showed that the liberalization of divorce law simply lowered the cost of the divorce transaction, ensuring the end of marriages that were already “on the rocks”, while having no impact in the long-run trend. (Smith 1997) Throughout the European continent, divorce rates have also climbed substantially in the post-WWII era. Some have indicated that the rise of the welfare state (itself a part of the inflationary regime) has encouraged both lower rates of family formation and more frequent divorce. (Balestrino et al. 2013)

In southwestern Asia, price increases in the Iranian housing sector and for dowry payments have been shown to drive increased divorce rates from 1982 through 2010. (Farzanegan and Gholipour 2015) The authors note that this is a particularly troubling social trend in such a conservative Islamic state. Also, in Pakistan, connections have been drawn between price increases for the goods that households typically consume to increases in domestic violence and female spousal abuse, clinical depression among both men and women, and understandably, an increasing divorce rate. (Khanam et al. 2015)

Across the planet, central bank inflation has led to price increases in the markets for goods that are important to families everywhere. There is little doubt that local customs surrounding family formation and expectations for familial behavior can produce a wide variety of responses to the loss of purchasing power. In order to capture more of those specific examples, this review will now turn to a more precise look at the realities of family life under the pressure of elevated prices.

PRICE INCREASES AND FAMILY FORMATION

In 1960, the average age for first family formation for US females was 20.1 years and 22.2 for males. Forty years later, the first marriage for US women had jumped to 24.4 and to 26.1 for men. (Schoen and Canudas-Romo 2005) Even greater change has been afoot in England and Wales during the same time period. There, the average age of first marriage for women went from 21.0 to 26.3 and from 23.4 to 28.3 for men. At the same time these researchers note the increase in co-habitation as an alternative arrangement for adults living together, leading to a decline in the real prevalence of marriage over time.

Recent research in the US regarding the later age of first marriage has yielded findings stating that the rising cost of higher education and the accompanying debt load held by both men and women is positively correlated to the average age of first marriage. (Addo et al. 2018) More specifically, Addo’s research shows that the greater the student loan debt, the more likely young men and women are to cohabitate and for longer as opposed to entering a marriage relationship. Furthermore, with more education, the expectations of young people are that they would marry one with similar educational status. (Becker 1974) In addition, it has been shown that MBA students not only raise their age of first marriage, but that they decrease the likelihood of ever being married at all. (Gicheva 2016) This relationship is stronger among female MBAs than for their male counterparts. Research has found that for every $1,000 in student loan debt that women carry, they reduce their odds of first marriage by 2 percent per month after undergraduate graduation. (Bozick and Estacion 2014) Although massive higher education debt loads are peculiar to the US it is plausible that if significantly negative net worth is carried into the housing market, that a person carrying the debt will seem less marriageable. (Bleemer et al. 2014) Alongside such credit-based challenges is the lack of affordable housing, a phenomenon that is hardly unique to the US. In Great Britain price increases in the housing market have also kept young people at home (and single) longer than in past decades, thus delaying the age of first marriage there as well. (Ermisch and Francesconi 2003)

The marked increases in East Asian first marriage age have also been driven by housing prices. In Singapore, qualitative studies on the attitudes of young singles make it clear that the male is under considerable social pressure from family and their potential spouse to acquire a flat. (Jones et al. 2012, Quah 2008) Delays in first marriage in Eastern Asia demonstrate similar trends as those in the US but to an even higher degree. In Japan the average age of first marriage for men has risen from 26.9 in 1970 to 30.5 in 2010. Their female counterparts have seen a change in this statistic go from 24.2 to 28.8. (Raymo et al. 2015) The pattern is similar in South Korea and Taiwan. The question addressed here is whether price increases have anything to do with this phenomenon. The literature does indicate that the later age for family formation in East Asia is largely driven by rising prices. These prices include the housing, education, food, and energy sectors. It is apparent to researchers that these increasing costs of living do have a positive relationship to age at first marriage. (Park and Sandefur 2005) These rising prices are coupled with cultural expectations of aspirational consumption which also contribute to first marriage delays. (Mu and Xie 2014) Other features that delay first marriages in East Asia include extended family expectations of co-residence, educational mismatches in the marriage market, and extended family expectations regarding fertility. Despite these nuances, the common theme of price increases and their positive correlation to age at first marriage is present both in the East and the West.

PRICE INCREASES AND FAMILY FERTILITY

When Robert T. Michael observed that poor families within the US experienced price increases differently than the wealthy, and that their experiences were worse than the reported CPI measurements, it became clear that the poor would behave differently than the wealthy in the face of rising prices than those of higher income levels. (Michael 1979) This reality inside the US makes Caldwell’s views on family behavior in underdeveloped economies versus industrialized nations all the more understandable. In his theory of wealth flows, it was explained that parents in underdeveloped parts of the world would respond to their lack of labor productivity and purchasing power with a set of choices that was distinct from their counterparts in the industrialized nations of the world. He observed that because low-skilled labor and wages were attainable by young children, their parents would seek their income generating efforts to combat the family’s lack of wealth. With this reasoning, parents would not only expect their children to work at an early age, but they themselves would respond to these conditions by having even more children, thus increasing the fertility per female in the underdeveloped world. In addition, the US welfare system creates incentives for unwed mothers to have more children and not to educate them beyond their years of free public education. By funding higher education, children would begin represent a negative net income flow. Thus, unwed and poor mothers are presented with an incentive structure that encourages non-education and the immediate (though short-term) benefits of children working in low-skilled labor markets in order to contribute to increased family income. (Caldwell 1983)

When it comes to the middle-class and wealthy in the United States, declining fertility rates have not only been linked to the reasoning provided by family economists like Caldwell, but healthcare economists have weighed in as well. The Journal of Medical Economics contends that the delay in first marriage and family formation contributes to overall lifetime fertility decline. With the increase in age of first marriage, and subsequent first conception within marriage, fertility rates are lower among women who have their first child later in life. This observation may seem as obvious as it is trivial. However, if it is clear that economic realities impact physiological outcomes, it is easy to see why some would describe increasing prices and the subsequent loss of fertility as a public health concern. (Tannus and Dahan 2018, Sunderam et al. 2015)

Simply put, the literature demonstrates a chain of events where the increases in education costs and housing prices delay first marriage, first childbirth, and ultimately lead to diminished fertility. To quantify the decline in fertility in the US, the average number of children per woman has plummeted from 3.65 in 1960 to 1.84 in 2015. (FRED 2019) Further study on the connection between rising prices and falling fertility suggests that parents sense a moral obligation to refrain from having children during periods of money and credit expansion via central bank policy (Abo-Zaid 2013) In this line of reasoning, parents observe climbing prices and recognize that providing education, nutrition, and general care will be more difficult as they lose purchasing power. Furthermore, this loss of purchasing power leads many married couples to seek more than one income, making child-rearing more difficult as the couple demonstrates a subjective preference for time working over time spent raising children. Earlier literature defends a model where this outcome means that the children of these parents will decrease the next generation’s labor supply, driving output per capita higher for women who will then substitute child-bearing for income earning. (Galor and Weil 1996) This theoretical connection, however, has not been found robust by some (Jones et al. 2012) who assert that the same would be true for males whose greater earning power would enable women to resume more traditional child-rearing roles.

Innovative research from England and Wales has emerged as researchers have sought to distinguish between the fertility response to home price increases between renters and existing home owners. The findings are complementary to those in the US for renters as higher home prices deter would-be owners from having more children. This negative relationship between housing prices and fertility does not hold for British homeowners from 1995 to 2008. (Washbrook 2018) Although there is a positive relationship between home prices and fertility for homeowners, this effect was found to be temporary. This finding is not necessarily contrary to economic theory because homeowners believe they will acquire more wealth in the future through the sale of that home. It is plausible that this anticipated increase in wealth makes them feel as though they are able to support more children. This explanation of homeowner behavior is consistent with earlier studies in the US where renters have a 2.4 percent decline in fertility for every $10,000 in average home prices, while the homeowners respond with a 1 percent increase in fertility. (Dettling and Kearney 2011) If we use Becker’s reasoning to shed some light on this outcome, it is reasonable to posit that for renters, the cost a future home will be too great to afford the cost of the delivery and care of an additional child. However, the reasoning could be reversed for families who currently own a home. They may look at the potential proceeds of the sale of their home as being a greater financial benefit allowing them to have another child and perhaps the purchase of a new home with more space to accommodate those additional children.

It has been found that for East Asian families, the negative relationship between price increases and fertility are not only present but have even stronger effects than they do in the West. Japan has been at or below replacement rates since 1957. South Korea has experienced a rapid decline in fertility since the 1970s, and Taiwan’s fertility has reached an extremely low 0.9 children per mother in 2010. (Raymo et al. 2015) Once again, these lower lifetime fertility rates are associated with higher age for a mother’s first marriage and first birth, spurred by the high costs of education and housing. In fact, the average age of first delivery in Japan reached 29.3 years of age in 2010. In the same year, the mean age at first birth reached 30.1 in South Korea and 29.6 in Taiwan. Other literature on East Asia explicitly refers to Becker’s model of fertility behavior when studying the impact of housing prices in Hong Kong upon fertility rates from 1971 until 2005. (Yi and Zhang 2009) Using a cointegration analysis, researchers found that for every 1 percent increase in housing prices there was a statistically significant negative relationship in fertility rates of 0.45 percent. Further testing revealed that housing price inflation can account for about 65 percent of the fertility decrease in Hong Kong since the 1970s.

The general pattern of the literature paints a picture of middle-class and wealthy families in developed nations who reduce their fertility in response to rising costs of housing and education. In pre-modern economies as well as among the poor in developed nations with sizeable welfare states, the literature points to a pattern where parents increase their fertility rates in order to benefit from the net positive income that children can produce. This is especially the case in low-skilled labor markets within those nations. Parents in those situations will often remove their children from schooling as the opportunity costs to the family’s standard of living is too great. (Rosenzweig and Evenson 1977)

PRICE INCREASES AND FAMILY FAILURE

When substantial price increases occur in the markets for goods and services demanded by married couples, the returns on staying married are diminished. This finding by Nunley and Zietz is clarified by observing the dramatic rise in the US new divorce rate through the 1960s and 1970s. When the stagflation era ended in the early 1980s, they find that a slowing of price level increases also contributed to a decline in the rate of new divorces which continued through 2005. (Nunley and Zeist 2012) The literature also shows that when unexpected macroeconomic shocks occur, changes such as increasing prices or increasing unemployment also produce higher rates of divorce. (Becker et al. 1977) The causal link between the rising price of consumption goods and divorce begins when spouses have to increase the quantity of labor supplied to maintain the same levels of spending and leisure as they had previously enjoyed. This then leads to a decrease in the time spent on leisure and household production, leading to relational tension and conflict. Since potential wage increases do not keep pace with price increases, there are worsening financial and relational returns on the marriage relationship. (Christiano et al. 2001)

Some literature has emphasized the increases in women’s educational attainment and their higher labor force participation rate as leading causes of increased US divorce rates in the 1960s and 70s, but these findings are not without controversy. (Lombardo 1999) This dispute arises because others have found that it is the higher divorce rate which drives an increase in the labor force participation rate among women who have already received higher amounts of education in the preceding decades. (Bremmer and Kesselring 2004, Spitze and South 1986, Mincer 1984) This approach suggests a feedback loop where more divorce leads to more female labor force participation, which leads to greater earning power, and eventually more divorce. Yet another explanation for the higher divorce rates in the 60s and 70s is that rising prices required both spouses to work outside the home. This macroeconomic shock required women to begin accelerating their entry into the workforce, which created the relational tensions already described. The resulting large-scale female entry into the workforce disrupted familial harmony, child-rearing patterns, and the domestic division of labor. This narrative is substantiated by Nunley and Zietz’s empirical methodology which produced results showing a positive relationship between inflation rates, nominal GDP growth rates, increasing amounts of women’s educational attainment, and divorce rates. (Nunley and Zietz 2012) However, this study does not establish links between those 3 determinants which leads to opportunities for further study. One important caveat to this explanation is that it does not include the liberalization of divorce laws. While some have suggested that this is a driving force in the high divorce rates, (Friedberg 1988) Nunley and Zietz exclude this variable due to the literature that shows that the advent of no-fault divorce law in the US has a small and short-lived positive impact on increasing divorce rates, but no impact on long-term frequency of divorce. (Wolfers 2006)

In the British context, the literature also seeks to establish the multivariate causes of divorce including the legal framework within the UK as well as macroeconomic triggers. The literature notes that when reforms in divorce law were introduced in the European context, divorce rates were already climbing and the supply of these reforms merely met the demands for innovation and lower costs for divorce. In other words, the reforms were a response to rather than a cause of rising divorce rates. (Becker 1993, Michael 1988) Over the course of the post WWII period, the UK has experienced similar trends in the divorce rates as those in the US. The British had rapid increases in rates of divorce in the 1960s and 70s and found that rates were lower from the rise of Thatcher onwards. (Smith 1997) In Britain, Smith reaches similar conclusions as Wolfers did in the US. While there is a positive correlation between divorce liberalization and the divorce rate, the correlation is weak and temporary. However, a lack of literature is clear in the case of identifying the impact of price increases on divorce rates in Great Britain. This lack of research may be the result of a lack of concern over the issue in general as societal values regarding divorce have moved from viewing divorce as a taboo to viewing it with indifference.

In the Middle East, the issue of divorce is hardly viewed lightly and is even considered a public health risk due to its negative impact on children and women. (Barikani et al. 2012) A significant body of research has come from Iran in recent years. When examining the causes for a rising divorce rate in the Islamic Republic, both women and men cite economic dependence upon other family members for maintaining an acceptable standard of living as a leading cause of divorce. Fifty eight percent of men seeking divorce in this literature cite economic dependency upon extended family members as a driving force in the dissolution of their marriages while 49 percent of women say the same. Furthermore, 53 percent of divorced females specifically cited their former husband’s inability to pay for the rising cost of living as a prominent factor in their divorces. Additional research from Iran indicates that from 2002 through 2010, Iran had reached the highest divorce rate in the Islamic world. Furthermore, the price of housing both for renters and owners was directly linked to marital tension and divorce. (Farzanegan and Gholipour 2015) In addition, rising unemployment rates and increases in both public and private spending on education were positively correlated to this change in divorce rates. In a unique urban setting, Tehran was found to have thousands of vacant investment residences thus reducing the supply and driving rental prices to very high levels. Farzanegan and Gholipour are careful to point out that when there are sudden and unexpected surges in housing prices, there are even stronger positive effects on the divorce rate. In an interesting note on education spending in Iran, these researchers explain (like Caldwell) that increasing prices for education also suggest lower fertility rates among married couples. The lower number of children in turn diminishes the social pressure for families to remain together. In other words, families with fewer children have a higher likelihood of divorce than those who have offspring.

A compelling cultural idiosyncrasy in Iran that has been shown to drive increasing divorce rates is the practice of ‘Mehrieh’ or a dowry. This payment is traditionally required to be delivered in gold coins. (Farzanegan and Gholipour 2018) The price of a gold as a reliable measure of a loss of overall purchasing power is one of the most commonly accepted premises in monetary economic theory. The Mehrieh asserts the legal right of the wife to request payment in gold jewelry or coin at the time of marriage or after the marriage has already begun. The ever-increasing nominal price of gold places great financial strain on the male partner, thus producing further marital tension. The existence of this arrangement has also been found to cause an increasing age of marriage formation by an average of 3 additional years from 1986–2011. The cultural purpose of the Mehrieh is to act as a form of self-insurance for the wife and her family. It us used to cushion the financial blow of a divorce in order to protect women from economic ruin after a divorce. The Mehrieh this lowers the cost of divorce for women, making it less likely that women will remain in tense marriages. In addition, young brides who are aware of the diminishing purchasing power of currency versus gold actually plan for an early divorce in order to collect the Mehrieh as an appreciating asset in order to facilitate their own independent living arrangement. Although this narrative may present a system of perverse incentives to the western mind, it does illustrate the similarity of effects on families due to falling purchasing power against real assets like gold or housing and the increasing divorce rates to match. (Conger et al. 1990, Jensen and Smith 1990, Amato and Beattie 2011, Harknett and Schneider 2012, Dehghanpisheh 2014)

Eastern Asia, like the Near East and West, has also experienced rising divorce rates and the literature points to similar causes as those in other parts of the world. The general literature surrounding East Asian marriage points out that marriage as an institution has become increasingly less attractive for both those who would be married and for those who are already in marriages and that macroeconomic factors play a significant in the decaying esteem of marriage. (Bumpass et al. 2009, Rindfuss et al. 2004) While many values of East Asian marriage remain intact, some researchers show that it has adopted western values as well. (Cai 2010, Thornton et al. 2012) In light of these changes, projections show that 20 percent of South Korean marriages are expected to fail by 2023. (Park and Raymo 2013) Nearly 1/3 of Japanese marriages are expected to end in divorce. (Raymo et al. 2004) One important contrast between those who divorce in East Asia is that divorce is clearly more prevalent among lower income couples than for higher income families. This narrative is similar to the one in Iran where young and relatively low-income families have difficulty affording suitable housing and the relational strain placed on marriages has a corrosive effect on their longevity. These lower income families are also less educated and as such researchers have shown that there is a strong negative relationship between education level (and thus earning and purchasing power) and divorce rates. (Chen 2012)

CONCLUSION

Across the globe, family formation, fertility, and failure are all impacted by rising prices. In the US, the age of first marriage is higher than ever due to high education costs that are manifest in increasing debt loads for young adults. This reality means that their incomes are redirected to debt repayment, making already increasing housing prices even harder to afford. Throughout Europe and East Asia housing affordability is also leading young people to delay their first marriage as well. Across the globe, these increasing prices are making cohabitation more financially sensible than marriage.

The literature shows that fertility decisions are distorted in the developing world and for the poor in developed countries. A pattern emerges that when prices rise, parents have more children as they are viewed as adding to family assets. Families make these reproductive decisions and at later ages may pull children out of school due to their ability to earn incomes through their low-skilled labor in order to combat price increases. This keeps families from making investments towards their children’s education and eventually, a higher standard of living. Meantime, in the developed world, wealthier parents choose to have fewer children in response to increasing costs for housing and for educating their offspring. The body of literature concurs with much of Caldwell’s theory on intergenerational wealth flows.

Research from across the globe shows that when married couples are met with falling purchasing power, marital tensions rise. In the developed world these couples who face rising prices have less motivation to stay married as the average number of children is already relatively low. In the underdeveloped world, the literature shows that the relational tension brought on by rising prices is exacerbated by cultural expectations of male provision and extended family pressures. This is a recipe for higher divorce rates even among some of the most traditional societies.

All of these realities show a body of literature that affirm Kuyper’s vision of the family institution being under stress from man-made institutions such as central banks who produce debased currency and easy credit. This state of affairs leads to the detriment of families as they see the value of their savings and purchasing power evaporate for the things that are most important to maintaining a suitable standard of living. The literature described in this review paints a picture of the ‘deinstitutionalization’ of marriage and family that Cherlin described. In seeking a common thread among the erosion in the quantity and quality of marriages throughout the world, it is the loss of purchasing power brought on by central bank money supply inflation which drives people to avoid marriage across the world through delay, cohabitation and divorce. Children in poor nations suffer under inflation as well because their parents require them to work so that the family might survive. Meanwhile, in the developed world, children see less of their parents as two incomes are often necessary to make ends meet, while their parents’ marriages are under threat of divorce due to the relational and financial difficulties brought on by rising prices.

There is room in the body of literature for a stronger statement on the strength of the correlation between rising prices in the categories that are important to family formation. More work remains to establish how tuition rate increases in the US lead to higher ages of first marriage. There is also an opportunity to describe the distinctions between fertility decisions in the developed and developing economies of the world. Research could focus on price increases for childcare, education, food, energy, and housing for their impact on fertility rates in both types of economies. The literature on housing and gold prices increases and divorce has received a very promising set of studies from Iran and researchers could attempt the same type of examination in other nations as well. While several attempts have been made to describe liberal divorce laws and changing norms regarding sexuality and views on cohabitation there is also room for more specific links to discover which prices in the economy have the most powerful effect on marriages that end in divorce.

In the end, we observe that a divinely-created institution can have its definition and even its existence malformed and eventually crushed under the weight of man-made institutions like central banking cartels. This description of the deinstitutionalization of the family and marriage should warrant serious attention from Austro-libertarian thinkers. The simple reason for this is that marriage and family are distinctly non-state institutions that have always been capable of providing wealth, order, and continuity, within a framework of peaceful and voluntary cooperation. Therefore, family holds a unique place among institutions as a bulwark against the deleterious effects of the welfare state. As such, it is an institution worth defending and strengthening as the Austro-libertarian school aims to abolish man-made central banks and replace them with free-market money production and consumption.

Supporters Summit 2020

Wed, 06 Nov 2019 11:45:00 -0600

Does Milton Friedman's "Plucking Model" Refute Austrian Business Cycle Theory?

Robert P. Murphy — Wed, 06 Nov 2019 11:15:00 -0600

Noah Smith has a new Bloomberg column titled, "Milton Friedman Got Another Big Idea Right." Specifically, Smith points to a new paper that apparently confirms Friedman's famous "plucking model" of recessions. Here's how Smith contrasts Friedman's theory from others, including the Misesian theory of boom-bust:

Some [business cycle] theories hold that booms cause busts, because good times allow bad investments to build up in the financial system. According to these theories, the larger the boom, the larger the crash that follows.

Then there’s the so-called plucking model. Proposed by the legendary economist Milton Friedman, it holds that the economy is like a string on a musical instrument — recessions are negative events that pull the string down, and after that it bounces back. Just as a string snaps back faster if you pull it harder, this theory holds that the deeper the recession, the faster the recovery that follows. But you can only pluck the economy in one direction; bigger expansions don’t lead to bigger recessions.

Back in 1996, Roger Garrison published an excellent Austrian response to Friedman. But let me give a quick version here:

The data by which Noah Smith thinks Friedman's plucking model has been vindicated, are perfectly consistent with Mises' theory as to what causes recessions. To see why, let's just imagine a simple (and exaggerated) example.

Suppose the whole labor force is dedicated to making hardware. In a normal, sustainable period of growth, 10% of the workers make hammers, 40% make nails, 10% make screwdrivers, and 40% make screws. This is healthy, balanced growth, where the underlying capital structure is sustainable.

Now suppose because of central bank manipulation of interest rates, the price system is screwed up and all the workers start making hammers. This won't boost "total output." There will still be "full employment." It just means that the composition of output will be heavily skewed to hammers, and away from nails, screws, and screwdrivers.

This is obviously not a sustainable path. Soon enough, the supplies of nails and screws will run out. It does little good to be cranking out hammers, if there are no new nails coming online.

What I've just described is a metaphor for what happens during an unsustainable boom, in the Misesian sense. Now once the crisis hits, "total output" does indeed drop, as workers need to be reallocated back to a more sensible niche in the division of labor.

Now as a completely separate issue, it's clear that the increase in output measured from the trough is going to be directly related to how deep the trough is. In our example, the "crash" is going to be really bad, because the economy is going to suddenly run out of nails and screws completely. If instead the workers had only been slightly knocked out of balance, then the ensuing crash wouldn't be as bad.

But either way, my point is that the wild swings in "total output" will appear to follow a bust-boom pattern, rather than a boom-bust one. This is so, even though by construction, my story fits the Misesian pattern of an unsustainable production period being followed by an inevitable bust.

For more details, read Garrison's article, or my earlier "sushi article" that many people found illuminating.

The Feds Spend More on National-Debt Interest Than You Think

Mark Brandly — Wed, 06 Nov 2019 11:15:00 -0600

Recently, the Treasury Department reported a 26% increase in the federal budget deficit with a 2019 deficit of $984 billion. The reported data on the budget can be misleading. You might think that a budget deficit is the amount of spending that exceeds budget revenue, in other words, the amount of borrowing needed to make up for this shortfall. However, in the world of Washington D.C., not all spending is counted as spending and it’s possible for the government to borrow money from itself. Let’s look at the actual Treasury Department budget numbers.

The Treasury reports the Total Public Debt Outstanding of almost $23 trillion, which is the sum of the Intragovernmental Holdings and the Debt Held by the Public.

There is roughly $6 trillion of Intragovernmental Holdings. This is money that the federal government says that it owes to itself. Over the years, the government has earmarked tax revenues for one use, say Social Security spending, and spent those revenues on some other category of spending. So now they owe themselves this money. However, this is not truly debt. No business or household is concerned about being in debt to itself. If you promise to spend $100 of your income on a car payment and instead you buy $100 of food, you don’t pretend that you owe yourself $100. However, in the feds’ budget this is called Intragovernmental Holdings. When looking at the debt numbers we should ignore these Intragovernmental Holdings.

That leaves us with the Debt Held by the Public, what I consider to be the true amount of federal government debt.

In your personal life, if you earn $100, you spend $120, and you borrow $20 to cover this shortfall, then your personal deficit is $20. Similarly, if the feds have $100 billion of revenue and spend $120 billion, then they must borrow $20 to cover this spending. That $20 increase in their debt is the deficit. So the true deficit is the change in the Debt Held by the Public.

Here is the Treasury Department data for the Debt Held by the Public since 2001.

The Congressional Budget Office has reported that the 2019 deficit is the highest that it’s been in seven years. As you can see from the numbers above, that report is not quite accurate. The deficit peaked at over $1.7 trillion in 2009 and while the deficit is distressingly high, the 2018 and 2016 deficits were slightly higher. The deficits of this century under the Bush II, Obama, and Trump administrations should concern all of us. The government’s debt has increased 400% in 18 years. And we’re projected to have trillion dollars plus deficits for the foreseeable future.

How much interest does the government pay on their debt? Since the government owes is in debt to itself, it pays itself interest. We should ignore these intragovernmental interest payments for the same reason we should ignore the intragovernmental debt.

Fortunately, the Daily Treasury Statements provide us with the Interest on Treasury Securities. This is the actual amount of withdrawals from government accounts for interest payments, so this number ignores intragovernmental interest payments. Here are the numbers.

From FY 2001 to 2019, interest payments increased 88% from $162.5 billion to $305.7 billion. As I previously stated, during that same time, Debt Held by the Public increased 400%. For the last several years, the feds have taken advantage of artificially low interest rates. If interest payments had increased at the same rate as the level of debt, the 2019 interest payments would be $818 billion. For comparison sake, payments for Security Benefits in FY 2019 were $921 billion. As the government continues to pile up trillion dollar deficits, when interest rates return to a historical norm, interest payments may exceed payments to Social Security recipients. With the coming budget deficits, it’s possible that interest payments could surpass a trillion dollars annually in the next decade.

Generally, the political class appears to be unconcerned about the budget deficits. Those who are troubled about budget issues are generally concerned that the deficits will out of control in a couple of decades. The 2019 Congressional Budget Office Long Term Budget Outlook report states that the 2019 federal debt held by the public equals “78 percent of gross domestic product (GDP) — its highest level since shortly after World War II. If current laws generally remained unchanged, growing budget deficits would boost federal debt drastically over the next 30 years, the Congressional Budget Office projects. Debt would reach 92 percent of GDP by the end of the next decade and 144 percent by 2049.”

Don’t be fooled. A budget crisis could occur much earlier than 2049 because of the level of borrowing needed to fund the deficit and its debt payments. It’s reported that the federal government spent about $4.75 trillion last year . This ignores the government’s debt payments. According to the Treasury Department, total spending in FY 2019 was nearly $16 trillion. (In the Daily Treasury Statements, this is calls Total Withdrawals.) By reporting spending to be $4.75 trillion, the feds are hiding most of their spending from us.

The federal government is borrowing a tremendous amount of money to make its payments on its Debt Held by the Public. The final Daily Treasury Statement of 2019 tells the story. In the past fiscal year, they borrowed $11.9 trillion (called Public Debt Cash Issues) and made debt payments of $11 trillion (called Public Debt Cash Redemptions). If we include all borrowing and debt payments to be part of the federal budget, then the $11.9 trillion of borrowing constituted 74.5% of federal spending and debt payments were 68.5% of federal spending. Debt payments in 2019 were over twice as much as all other combined spending.

Here is the historical data for the Public Debt Cash Issues and the Public Debt Cash Redemptions.

Note the skyrocketing amount of borrowing in the past 19 years. Since 2001, Public Debt Cash Issues (total borrowing) increased 375% and Public Debt Cash Redemptions (debt payments) increased 311%.

The danger here is that lenders at some point may not be willing to loan our government these trillions of dollars a year. In the last 18 years, Public Debt Cash Issues increased at an average rate of almost 9% per year. This is not sustainable. If the federal government continues to increase its borrowing at 9% annually, in 2030, the feds will need to borrow over $28 trillion to cover their spending on the deficit and debt payments. The moment lenders become unwilling to fund this budget recklessness, the government’s financial houses of cards will collapse.

The American Middle Class Isn't Disappearing — But it's Not All Good News

Ryan McMaken — Tue, 05 Nov 2019 17:15:00 -0600

I'm not of the opinion that the American economy is doing amazingly well. However, I'm also not of the opinion that it is falling apart, or that the American middle class is disappearing before our eyes. Nor is there is no one, single, magic statistic we can point to and say "see, we're all worse off — or better off — now." Aggregate economic data is by its very nature lacking in nuance. Moreover, different measures of economic growth and prosperity can be conflicting and woefully incomplete. This doesn't mean all such measures are worthless, but it does mean we can't responsibly point to, say, a single jobs statistics and declare "happy days are here again!" or "the middle class is disappearing!"

The fact that the economy may be getting better or worse doesn't necessarily help me as a proponent of laissez-faire one way or the other.

Since we live in a very complex economy with both a sizable private sector and an enormous government sector, I could easily spin statistics on income and economic growth either way.

For example, we live in a time of ever-increasing government intervention in terms of tax collections, government spending, and regulation of the private sector. Given the enormous size of both state and federal governments, I could claim bad economic news proves big government is ruining the economy.

At the same time, markets — that is to say, workers and entrepreneurs — have historically shown an amazing amount of resilience in delivering a higher standard of living in the face of enormous intervention through gains in productivity and innovation. Thus, I could also claim good economic news is evidence markets are making us better off.

All else being equal, of course, real wealth and income — i.e., not just wealth and income measured in dollars — goes up the more the state leaves people alone. But given that all else is not equal, a correlation between two data points doesn't — by itself — prove anything. That's why we need good economic theory. Data by itself is never good enough.

We're Becoming Better Off, but Only Very Slowly

But before we can start to blame the state of the economy on any particular thing, we have to try to figure out what the state of the economy is.

Over the years, I've concluded the available data strongly suggests the American standard of living for most Americans has slowly increased in fits and starts over the past twenty years. As I've noted here, here, and here, the American standard of living is clearly up considerably from where it was in the days of our grandparents's middle-age — i.e., the 1950s and 1960s. The size of homes, the quality and number of automobiles, the the number of hours worked have all sizably improved if we look at a time horizon longer than twenty years. The American standard of living also improved considerably from the late 1980s through the Dot-Com Boom.

Since the Dot-Com Bust of 2000, however, improvements are less clear. This is especially the case for men.

Household and Personal Income

So, is income going up for ordinary American households?

At the household level, the good news is the median income does indeed appear to be doing up.1 The bad news is it's only up from 2000's peak level since 2016. In other words, for most of the decade following the Great Recession, the median household income was actually down from both 2007's and 2000's peak levels.2 With the exception of the period since 2016, household income has basically gone sideways over the past eighteen years. As of 2018, household median income was only up 3.6 percent from the 2007 peak. We could compare that to the 8.5 percent growth that occurred from 1989 to 1999.3

Some critics of the household measure point out that the composition of households has changed over time, and thus household income is not a great measure.

That's fair enough, but personal median income doesn't show a very different trend.

Median personal income shows that — unlike with household income — 2007's peak is higher than the 2000 peak. However, it is only since 2016 that personal median income has exceeded the 2007 peak. That is, over the past decade the median income has only shown growth in the past three years, and median personal income was up only 4.2 percent from 2007 to 2018. That's compared to 15.8 percent growth from 1989 to 2000.

Much of the lackluster growth is due to real declines in median incomes for men. Median income for men began to fall in 2001, and it did not exceed the 2000 level again until 2018. In other words, by this measure, the median income for men went sideways for 17 years. It fell 2.7 percent during the economic expansion from 2002 to 2007. It finally topped 2000's median-income level in 2018, rising 0.4 percent over the 2000 peak.4

What growth we do find in median incomes is being driven in part by gains in incomes for women.

From 2007 to 2018, the median income for women rose 6.6 percent, although it only exceeded the 2007 peak after 2015. The median income for women rose an amazing 24.4 percent from 1989 to 2000.5

The Middle Class Isn't Disappearing, So Far

Clearly, not every group is getting richer at the same rate. Moreover, median incomes took a long time to recover from the Great Recession. Yes, median incomes are now up from where they were a decade ago. But for eight years after the 2007 peak, the median household found itself worse off in real terms.

Not everyone is at or near the median, however, and many contend that larger numbers of households are slipping into lower income levels while median numbers are buoyed by a relatively small number of wealthy individuals and households.

In response to this, we should note that median numbers — as opposed to average numbers — are not easily pulled upward by a small number of very wealthy persons or households.

Moreover, if we break out households and individuals by income categories, we find little evidence that more people are joining the ranks of the low-income. Indeed, if anything, more and more people are moving into income categories we think of as being toward the high end of middle class — or even upper-middle class.

Over the past forty years, for example, the proportion of households making less than $50,000 per year has continued to decline. The percentage of households with incomes under $50,000 fell from 49.5 percent to 39.9 percent, from 1969 to 2018. It's true that households in the $50,000 to $100,000 range also went down, dropping from 38.2 percent to 29.7 percent over the same period. But where did those people go? They weren't going into the under-$50,000 group because that group was shrinking. In fact, there are now more households in the over-$100,000 than in the $50,000-$100,000 category.

Indeed, it looks like many of them moved up into the over-$100,000 income category because the size of that group more than doubled from 12.3 percent of households in 1968 to 30.4 percent of households in 2018. (All of these categories are measured in constant 2018 dollars.)

Breaking out the categories further, we find that the under-$35,000 category fell from 34 percent of households in 1970, to 27.9 percent of households in 2018. The middle categories, from $35,000 to $100,000 were largely flat while the over-$100,000 category more than doubled. The middle-income group isn't disappearing any time soon, but we do find significant growth in the number of households entering the highest-income levels. Those households have to come from somewhere, any many are coming from the middle class. Contrary to the narrative that the middle class is becoming impoverished, this suggests the middle class is actually getting richer.

Gains have been less pronounced for men, although the same trend still holds. The proportion of males in the under-$25,000 income category fell from 52.6 percent in 1969 to 45.5 percent in 2018. Meanwhile, the proportion of males in the over-$75,000 category almost doubled from 13.1 percent in 1969 to 25 percent in 2018.

The proportion of men in the middle-income categories has been largely unchanged in recent decades, although the great recession appears to have pushed many men back into the lower-income category in the immediate wake of the Great Recession. Since then, the low-income category has shrunk again, and both the over-$75,000 category and the over-$100,000 category rose to all-time highs in 2018:

Women gained more than men, however, and women showed more of a shift from lower-income categories to higher ones. The proportion of women in the under-$25,000 category plummeted over forty years, dropping from over 73 percent in 1969 down to 46.4 percent in 2018. Meanwhile, the percentage of women workers making over $75,000 increased by more than twelve times over the same period. The Great Recession slowed these trends, but did not end them.

Broken out into smaller categories, we find the low-income category is falling while the $25,000 to $50,000 category has flattened. Meanwhile, the three top categories for income have increased sizably:

For women, the lowest income category has fallen considerably, while the income categories above $25,000 have all increased in recent decades. The highest income categories have increased the most, by far.

In spite of the many claims being made by both leftists and conservatives that the middle class is disappearing, and that basic amenities and comforts are becoming unaffordable. Nor are Americans separating into a bifurcated population of very-rich and very-poor groups, with only a small middle class in between. The more likely reality is that the lowest-income groups are getting smaller while the "middle class" now more frequently includes people and households in low-six-figures territory.

This isn't to say no one is becoming worse off. Declining real incomes are a reality for many people who lack schooling, job skills, and proximity to employment. Moreover, a rising cost of living in some parts of the country can be devastating. But expensive markets like California, Boston, and New York are not the entire country, and a great many Americans have managed to realize income increases in real terms in recent years. This is now true even when compared to the peak reached before the Great Recession.

The bad news, however, is the fact that incomes took so long to recover from the last recession. More than a decade of income gains were lost in many cases after 2007, and those losses were not fully reversed for nearly nine years in some cases. Moreover, we're now a decade into the current expansion, and even a moderate recession in the near future is likely to set income levels back twenty years.

1. The income measures discussed here measure "money income," which includes transfer payments, such as social security payments. This does not include in-kind benefits such as health-insurance benefits, food stamps, etc.
2. See Table A-2, Households by Total Money Income. (https://www.census.gov/library/publications/2019/demo/p60-266.html)
3. In all these income graphs, I have looked at peak-to-peak growth: specifically from 1989 to 1999 or 2000; from 2000 to 2007; from 2007 to 2018.
4. See Table P-54. Total Money Income of People, by Race, Hispanic Origin and Sex. (https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-people.html)
5. See Table P-54. Total Money Income of People, by Race, Hispanic Origin and Sex. (https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-people.html)

Per Bylund on The Laws of Agile

Hunter Hastings, Per Bylund — Tue, 05 Nov 2019 10:30:00 -0600

The management methods and practices that have been gathered under the term agile claim the status of a Copernican Revolution. Agile reverses the traditional view of business revolving around the firm, instead placing the customer at the center and viewing all other elements as revolving around the customer.

This is a welcome development — but just a step towards the Austrian vision of consumer sovereignty and the concept of value as created by the consumer, not the producer.

Key Takeaways And Actionable Insights

We examined the three "Laws of Agile" proposed by Stephen Denning in his book The Age Of Agile, and Per Bylund notes the elements that are useful for entrepreneurs, and the extra insights provided by Austrian Economics that can help entrepreneurs to perform at a higher level in facilitating value experiences for their customers and consumers.

The Law Of The Customer

Agile recognizes that the one valid definition of business purpose is to create a customer.
The customer — with mercurial thoughts and feelings — is at the center, and demands to be delighted.
What the firm thinks it produces is less important than what the customer thinks he / she is buying — what they consider “value”.
Everyone in the firm must view the world from the customer’s perspective, and share the goal of delighting the customer.
The firm must have accurate and thorough knowledge of the customer.
Continuous innovation is a requirement to delight customers.
The firm’s structure changes with the marketplace.
Speed of response becomes crucial and time is a strategic weapon.

Austrian Enhancements

The Austrian concept of Customer Sovereignty is even more powerful for entrepreneurs — customers create firms, in the sense that customers decide what is produced by buying / not buying, and therefore which firms are successful.
Value is subjective — and so customer preferences can change rapidly and frequently.
Responsiveness is not enough — the goal is to imagine the customer’s future needs, and involve them in the production of future value.

The Law Of Network

Collaborative network of competence replaces hierarchy of authority.
The network has no leader, but it does have a shared, compelling goal.
The network is the sum of the small groups (rather than individuals) it contains.
Each group has an action orientation.
The network’s administrative framework stays in the background. No bureaucratic reporting.

Austrian Enhancements

Agile is based on too narrow a view of the economic network. It’s still producer-centric.
The true network is the market — which includes customers (of which there are many more than firms, and who exert more economic influence than firms).
Networking the production side of the firm is an incomplete act.
A fully-functioning network includes customers and consumers with equally valid connections to the firm, not just collaborative production partners.

The Law of Small Teams

Big and difficult problems are disaggregated into small batches and performed by small cross functional teams — scaling down the problem.
7 +/- 2 is a good rule of thumb for team size.
Each team is autonomous, and works in small batches and short cycles.
Each team aims to get to “done” — it’s binary: either done or not done, never almost done.
No interruption.
Radical transparency.
Customer feedback each cycle.
Retrospective reviews.

Austrian Enhancements

A pure focus on short term execution can divert attention away from longer term considerations – especially, imagining the future, which is the core component of entrepreneurship.
Focus on creating value for the future, while ensuring no loss of current reputation and relationship.
Administration — and therefore “bureaucracy” — can’t be eliminated entirely without a reduction in customer value.
Required services can be a component of value creation — such as compliance, operations management, etc.

Additional Resource

"The Laws of Agile Meet Austrian Economics" (PDF): Mises.org/E4E_38_PDF

Question and Answer Panel

Joseph T. Salerno, Murray N. Rothbard — Mon, 04 Nov 2019 17:00:00 -0600

A question and answer period with Joseph Salerno and Murray Rothbard. Recorded at "The Federal Reserve: History, Theory and Practice," hosted by the Mises Institute at Jekyll Island, Georgia; September 4-7, 1986.

John Law and His Modern Counterparts

Joseph T. Salerno — Mon, 04 Nov 2019 16:45:00 -0600

Recorded at "The Federal Reserve: History, Theory and Practice," hosted by the Mises Institute at Jekyll Island, Georgia; September 4-7, 1986.

How Entrepreneurs Build the World

Per Bylund — Mon, 04 Nov 2019 16:30:00 -0600

Jeff Deist: Professor Bylund, you grew up in Sweden. What stands out from your childhood?

PER BYLUND: I grew up in a suburb of Stockholm, separated from Stockholm by just a lot of nature. It’s close enough to be part of the Stockholm metropolitan area, but far enough away from it to be on its own.

When I grew up in the 70s and 80s, I was given a very romantic view of Sweden and how everything worked, but I only realized later it wasn’t very true. It was the happy 80s, so there was no end to public funds for anything. Everybody went to free dental care and everybody had their teeth fixed, so everybody could have good smiles. I did that as well. During the early grades — from first through sixth grade — we had a lady who was hired only for one task. She visited each class once a week with a big tray of very colorful little plastic cups with fluoride. You were supposed to just swoosh that fluoride in your mouth between your teeth and then spit it out, but the beauty was that we got to keep the cups, so that was something that all the children collected back then. We got hundreds of those different fluoride cups in different colors. That gives you sort of a taste of what growing up in Sweden in the 70s and 80s was like. No problems. More money and government takes care of everything, basically.

JD: We hear a lot about Scandinavian models of governance. What can we learn from Sweden today, a country of 10 million people?

PB: We can learn a lot. Sweden is a story that goes back more than the past 150 years — going from being the poorest country in Europe to being the world’s fourth richest in 1970. That’s totally a free market story. It’s about deregulation, it’s about limiting the powers of government. It’s about separation of powers between the king and the parliament. There was lots of investments in infrastructure, but only in the supportive sense. There was not a whole lot of welfare state. That meant the welfare state started to grow, but not as fast as the economy, which means that the economy can cover for all the inefficiencies of the welfare state before the 1970s. And then, the more important lesson — or the not-so-common lesson — would be that the welfare state was started in 1970 and it really went berserk and it completely imploded after 22 years. So, that’s how fast it goes if you try to nationalize everything and really go for socialism.

You can see policies Sweden pursued back then are policies that politicians today are promising. One of the things that was a turning point in the 80s, at least policy wise and in people’s ideological consciousness was the Employees Fund. It was this new progressive proposal that the government would tax corporations and put part of their profits into a fund that was going to be run by the national labor unions. This fund had only one purpose and it was to reinvest that stolen profit into buying stocks in those corporations. It was nationalization, not of single businesses, but of the whole free enterprise system. And that was the wakeup call for the nonsocialist part of the Swedish population. As a result, there was a huge protest. If you know anything about Swedes, Swedes do not protest. The way we tend to say it about ourselves is that a Swede is really angry if he closes his fist in his pocket. You don’t get more out of a Swede. So, when you have tens of thousands of people protesting the government, of all things, in Sweden, it is a really big thing.

Beginning in 1970, progressive policies were enacted throughout that decade, depreciating the currency numerous times in a few years, just to cover the holes and increase exports to cover the expenses of the government’s progressive policies. Then in ’92, when the Swedish currency completely imploded, they set interest rates to 500%, trying to defend the fixed currency exchange rate. They couldn’t defend it, so they let it go and it immediately dropped substantially in exchange value. Then, surprise, it became a repeat of the Golden Century — from 1870 to 1970 — when government wasn’t the main driver of the economy. After 1992, all the parties agreed to cut back on the very generous universal welfare system. That is where Sweden is right now. The government is still very big even after they cut back a lot. Now since there is a little more money, they are discussing how to expand the welfare state, as politicians always do.

JD: As a young man in Sweden did you make a conscious decision to leave for America, or to become an academic?

PB: Yes, that was a conscious decision. I always was playing with the thought of having the whole world as a platform. I was always fascinated by, and dreamt in some sense, of moving to the US. That was a dream come true. Pursuing an academic career, that was a conscious choice. I was an IT consultant in Stockholm. I had a Master’s degree in informatics and I was working as a senior software developer and business consultant. But I spent basically all my time, when I’m not in the office, writing libertarian columns online. I published around 200 columns in one year on all different websites. Mises.org was one. And my then-girlfriend, now wife, simply asked me, “you don’t like your job, all you do is just study philosophy and economics, why don’t you quit your job and go back to school and pursue an academic career?” And like any man confronted by his woman, and being young, I immediately decided to do it.

JD: But why America in particular?

PB: The reason I ended up in the US is simple. I applied for PhD programs in Sweden, for three years. But I couldn’t get into those PhD programs. Part of the reason is that they are fully funded and are in reality full-time employments with an okay salary. You can only pursue a PhD in areas where you already have previous degrees. Swedish academia works like it does all over Europe. Your bachelor’s degree is very focused, and then you study your major and minor and nothing else. After that, you can pursue a Master’s and then you can pursue a PhD in the same discipline. I had, at that point, a degree in informatics that I was sort of basing my career on. And on the side, I was studying political theory at the university. I finished a Masters degree in that too. I was trying to get into a PhD program in political theory as a libertarian, and as a white heterosexual male. That made me sort of the last applicant that they would choose. I think the best year during which I applied they had four open positions in the country. I was not going to get any of those. I had one interview in three years. Then I sent my résumé to friends at the Mises Institute. I think the very next day, I get an email from Peter Klein saying “how about Missouri?” And that’s how I ended up in the US.

JD: Fast forward to today, and you’re a professor of entrepreneurship at the business school at Oklahoma State University. You’re very active on Twitter. You write for popular outlets like Entrepreneur magazine. Do you intentionally seek out a popular audience, beyond the parameters of a normal tenured professor?

PB: To some degree. I’ve been influenced by people like Joe Salerno, who says that an economist should really see economics as a vocation and not a professional career. I think that is correct. I also recall Mises saying that a public intellectual should be just that, a public intellectual. I realized the limitations of the classroom. I remember from my college career, you studied really hard for the test and then you go and party like hell to forget everything, so you have some space in your brain for the next test. People don’t really remember what they study a whole lot. But they do remember good stories and I think they need to be reminded over and over again of what the truth really is.

My job and my role as a professor is, yes, teaching in the classroom, and yes, do research, which is the main task. The job is also to reach out with everything I know and everything I’ve come across and with everything I learn to help others understand the world better. Today, most college professors are progressives and they definitely do not hesitate to take their own “arbitrary theories” of the world and make that their starting point in what they teach. So, I don’t see why I shouldn’t be able to tell the world about Austrian economics and how free markets work. For us as Austrians, it’s not as arbitrary as it is from a progressive perspective. We start with the action axiom and then we derive truths from there. It’s not an ideological thing. I’m spreading knowledge. I’m spreading what I know and what I understand. What I’ve learned doing this, both online getting comments from readers, and especially on Twitter, is that I get a lot of pushback. But I get a whole lot of questions too, and questions that make me have to rethink some things and dig deeper into my own knowledge. I use the classroom in the same way. I teach stuff that I know, but I encourage pushback and it’s all discussion-based, meaning I want them to push back and ask hard questions because that’s how we can all learn. It’s sort of a discovery process, overall, for both me and for others.

JD: You’re adept with Twitter. Despite the character limit, you don’t use it for trite self-promotion or sound bites. You actually create substantive threads.

PB: You know that’s really odd because Twitter is supposed to be this really fast medium — just slogans and stuff like that. I found out very quickly that the really long threads consisting of 30-35 tweets, with one argument building up throughout in those tweets, those are by far the most popular ones. Those are the ones that people retweet. Those are the ones that people like. Those are the ones that people connect with you and ask questions about. They go through private messaging on Twitter itself and that’s how I get the little following I have on Twitter. It’s totally through those longer ones, and it happens over and over again. When I think I write something really clever and really cool in just one single tweet, even if I retweet it a bunch of times, it just never takes off. People don’t really like slogans as much.

JD: A recent example of your Twitter campaign is a lengthy conceptual thread concerning value. People still struggle with the labor theory and marginal utility. They think cost, time, and inputs determine value, and ultimately determine prices. Why does this still trip people up more than a century after Böhm-Bawerk explained it?

PB: It is the power of economics, and I think it was Mises who somewhere said that the power of economics is to show people that it’s really the opposite of what it looks like. I think that is at the very core: people think they see things, they think they understand things, and they just create those patterns. The patterns do exist and they do observe the patterns, but they do not recognize the actual processes that create those patterns. And the role of the economist is to point out that these are the true processes, whereas everybody thinks that those processes are very different.

The labor theory of value was debunked by Böhm-Bawerk almost 150 years ago, and yet, it’s very much alive because that is where people start. They think of value as objective and they think of value as being the creation of labor. But it is really the other way around. We invest labor because we think we’re going to end up with something valuable. I think that is the very core of the Austrian school. It’s also a core insight that completely changes how you view the world and I use that a lot when I teach entrepreneurship. That’s something that entrepreneurs figure out themselves because they make so many mistakes following the objective-labor-theory-of-value type of view of the world. They realize that it doesn’t matter what they think or what they think they have seen, but value is truly in the eyes of the consumer. They have to figure that out and that’s their task. Entrepreneurs in general, especially experienced entrepreneurs, are truly and fundamentally Austrians.

JD: Even entrepreneurs focus too much on cost?

PB: Yes, it is strange, but people tend to think of cost, which makes sense, when you’re producing something. What do you have first? Well, the thing you have first is the cost, and because you assume that cost, you have a product that you can then potentially sell and make a profit. If you think about it in technological terms, it makes sense to start with the cost because there is value. But, as Menger showed us, that’s not the case. We pursue this end because we think the end is valuable to us. We expect value from this end and therefore we are willing to assume those costs. And there we go again. It’s exactly the reverse of what we think of the world, but people are really, really sure that it’s cost that creates value. Unfortunately, they are taught that in school, too. I mean, it’s intuitive. For most of us just observing the world, there isn’t much pushback, not even in school. Not in the first 12 years, not in college, even if they major in economics. They’re not going to understand subjective value, they’re just going to look at it as money values and it’s not until they encounter a professor associated with the Mises Institute, or Austrian economics, that they’re going to get some pushback. By then they’re already old and you know about old dogs and new tricks. It’s hard.

JD: Why did you decide to specialize in entrepreneurship and theories of the firm?

PB: It happened through Peter Klein. When I started, he was an assistant professor, still not tenured, in the Department of Agricultural Economics at Missouri. But agricultural economics is not “real” economics, if you ask any economist. The department was a little bit weird and marginalized to begin with and they are, of course, very focused on farming and agriculture. But there was also a focus on regional economic development because they are an outgrowth of the land grant mission as with many public universities. In this department, they had an eclectic approach to economics because there was already a group of professors doing entrepreneurship and transaction-cost economics. It was a little more practical and applied than a regular economics department.

But in my work there, when reading Ronald Coase, I immediately realized that something is completely and fundamentally wrong with his thesis. I couldn’t figure out exactly what, so I dedicated my dissertation to, in a sense, disproving him and drafting my own theory of why there are firms and what sort of function they have in the market economy. That idea was interesting because it also has to do with the Mises Institute.

I was sitting in the second floor of the Mises campus as a Research Fellow during one of my first summers as a grad student and sifting through books by Mises. I was reading up on, and trying to figure out, what the heck is going on in the economy overall and how to understand where productivity comes from, and where wealth comes from. And it suddenly just struck me that maybe it has something to do with specialization. I remember going immediately to Joe Salerno’s office and asking him if he thought that was a good project to work on, and he looked at me and said, basically, “huh? I’ve never heard that explanation for the firm before.” That, of course, was enough for me to think that that’s something worth pursuing. If he has never heard of it, then obviously there’s got to be something there, or I’m completely wrong, and if so then I’m going to figure that out. Peter totally approved of the idea too, and I pursued that. My dissertation is, in a sense, a refutation of Coase’s concept of the firm. My position was, “how can you have firms if you don’t have the entrepreneur at the very core?” So, that became it.

And how did I get into the professional academic career as an entrepreneurship professor? Well, there’s a bunch of luck and coincidence, because both Peter and I were in the Department of Agricultural Economics. It’s not an obvious path to move into the business school and start teaching and doing research there. I mean, as competitive as it is to try to get a tenure-track position, if you have training in a completely different discipline, then you’re basically excluded. So, how do you do that?

Here is where luck and coincidence play a part. I was playing squash with friends in grad school. One of them was in the Management Department where entrepreneurship is usually studied. It happened he was also playing squash with his advisor, who turned out to be the new department chair in Management. So, I played his advisor as well and the advisor said, “oh you’re an entrepreneurship guy, right? … We need someone to teach entrepreneurship because we don’t know anything about it and no one’s really interested in entrepreneurship in our department. Do you want to teach for us?” So, my first job after graduating was one year of adjuncting, which I can’t recommend to anyone because it’s nuts, and not really paid. I made less money being an adjunct teaching seven courses that year than I did as a grad student.

That year a research position at Baylor University also opened up, and they were looking for someone in entrepreneurship and policy. The position was also associated with free enterprise. It turns out that if you want something in entrepreneurship and policy, you are in a very bad position because entrepreneurship scholars know nothing about policy and those who do know something about policy are either political scientists or they don’t know anything about entrepreneurship because economics threw out the entrepreneur from their models a long time ago.

I was the only candidate for two positions and I fit in perfectly as an Austrian economist studying and teaching entrepreneurship. I got that research position. It was a three-year position and that gave me enough time to just do research and try to get published in the journals, which is necessary to get a job in academia. And that, in turn, led to my position now at Oklahoma State. It was quite a bit of luck and lots of coincidences. The reason I have a pretty good career, and a good position now, is basically because I was playing squash with the right people and because I happened to be with Peter and other professors doing entrepreneurship stuff. And now, of course, Peter is at Baylor, so we both moved away from agricultural economics.

JD: Distill for us your theory of the role of the entrepreneur, and your theory of the firm. How does the Austrian school inform your thinking?

PB: My focus is on studying the problem of production. We know that through the more intensive division of labor, we get more productive, but we also know that the market economy is decentralized. If it’s decentralized and it is also very specialized, that means that you have to also be compatible with everything around you in the sense that if you’re specialized, you use standard inputs to produce standard outputs in any supply chain or production process. So, how do you get from there to introducing highly specialized production processes? You can’t do it individually. I can’t suddenly specialize in the standard way of thinking of specialization, which is simply cutting up an existing task into smaller and smaller, more
and more narrowly defined subtasks. If I have this standardized task that I am carrying out, if I say “well, I’m really good at this one-third in the middle,” I can’t just do the one-third in the middle because that makes me incompatible with both the other standard inputs traded in the economy and I will not produce complete outputs that someone else can use. If I do the middle third, I have to combine my efforts with the first third and the second third. I have to work collectively with them to organize and coordinate the introduction much more intensively than a specialized production processes.

I developed this imaginary construct of this specialization deadlock. The deadlock is this: if we push people to just continue specializing as much as possible, we’re going to end up at a point where no one can specialize any further because that will make them incompatible with the economy, and then whatever they’re producing is incomplete. They will not be able to be part of any existing production process. And from there, of course, the solution is, in a sense, obvious. You need someone to come up with the idea for how to replace a part of the production process or the whole production process, whatever it is and coordinate those new tasks that need to be carried out. You need to create this whole process, in a sense, with new types of specializations that have not existed before. Obviously, the whole thing stands or falls with everything working out because if anybody fails in this new chain that you’ve created, it is itself incomplete and incompatible with the rest of the economy. In order to break free from the specialization deadlock, you need to create these islands of more intensive specialized production. This must be coordinated by and led by the entrepreneur, who Mises has as the driving force of the economy.

Ludwig Lachmann talks about it as the truth function of the entrepreneur: it is to change the capital structure of the economy which is exactly what this is. This is how you make the production structure more roundabout: by splitting tasks up in more specialized subtasks, introducing capital potentially to make this happen. For me, at least, it fits perfectly in how the market economist solves that problem of specialization itself.

JD: Mises characterized entrepreneurs as “uncertainty bearers” and Israel Kirzner characterized their alertness to opportunities. Is this a distinction lay people like me should care about?

PB: I think it’s very important to understand the role and function of entrepreneurship as creation of new goods and services, and new conceptualizations of goods and services. I like to call it more the facilitation of value, since value is in consumption. The consumer can create the value by simply consuming a good or service, but where do these goods and services come from? They come from entrepreneurs trying to figure out how to better serve the consumers. That makes it very clear that the judgment necessitated by entrepreneurship — and the uncertainty-bearing function and also the imagination of it — are really core to understanding the economy overall.

JD: When Mises says uncertainty that means risk, the possible loss of capital and time. We might call it skin in the game. As you know business school critics like Nassim Taleb say entrepreneurship and business acumen can’t be taught. Professors aren’t business people with skin in the game. Give us your take: can entrepreneurship be taught?

PB: The short answer is yes and no. What I mean by that is simply I don’t think you can teach how to be a successful entrepreneur. That’s pretty obvious because if you could teach that, then obviously I, and other professors, would know how to be successful in the marketplace, and then why the heck would we be professors instead of not making money in the economy? We do not know how to actually be successful, but we know how to avoid a lot of errors that people make. What you teach first is all the tools that are either necessary or have a function: accounting, marketing, and all this stuff that business schools teach. In terms of entrepreneurship per se, learning how to think about business and where value comes from can be taught and it has to do with what we were talking about before. Understanding value and how to get to it, is very important. There really are two components to this. The first part is to understand the economy — that is, sound economics — so you don’t start investing just before the bubble bursts, so that you’re not tricked by asset bubble thinking. The other part is to understand people, primarily consumers, being able to put yourself in their shoes and understand what would create the most value for them. What are the most urgent and important problems that they have? How can you satisfy their wants or help them move away from the uneasiness that they’re feeling? Those two aspects can definitely be taught. Maybe not completely, but enough to understand how to not mess up as an entrepreneur.

JD: Austrians suggest that many entrepreneurs don’t recognize how important monetary policy really is. Professor Bryan Caplan criticizes Austrian business cycle theory on the ground that smart business people could figure out the booms and busts central banks create, rather than fall prey to malinvestment. Do you think this holds up?

PB: Entrepreneurs are not specialized in economic theory, and why would they be? Economic theory is not always super applicable to what they’re doing, and there is an opportunity cost to learning stuff and deep diving into most of the aggregate data. So theory is probably not worthwhile. There’s also this little thing called profit. During a boom — even an unsustainable boom — you can make tons of money if you are investing right. And most entrepreneurs think they are investing right and they’re following signals that are false because the interest rates are too low. Even if they know that the bubble will burst, why would they sit at home and not get that money that is available for them? They can grab the money by running a business. What they need to do is get out before anybody else. They usually think that they can do that, when they see the signs. I don’t think even if you have the time and interest in learning business cycle theory, you would be a poor entrepreneur if you just said, “well, this is an unsustainable bubble, so I’m just going to sit this one out.” Besides, it could be an unsustainable bubble that lasts for 10 years, like we’ve seen now, since the financial crisis. Are you just going to sit on your hands and not make any money for 10 years just because you know that this bubble will eventually burst? That doesn’t make any sense at all. Many entrepreneurs do get out in time, so it’s not really about learning because every actual situation is unique in many ways. Learning the theory which tells you what is going on in universal terms, theoretical terms, that definitely helps you. But it doesn’t help you to get out in time because the timing of it is not down to the theory that can help you predict.

JD: I have one last question for you. Critics on both the Left and Right increasingly seem to claim economics is not a real science or discipline. Economists just provide intellectual cover for business interests. There are no economic laws, just policies that legislatures can command. I’d like your response.

PB: I think it’s silly. That’s my short answer. What it really shows is, in a sense, economics has made its own bed because economics is not very helpful. Economists, using math and throwing out the entrepreneur, what they’re doing is providing the planning tools for the central planner and they think that they can do it. The recent Nobel Prize is just proof of this, that they’re conducting experiments thinking that they can find real truths about how to produce better policy so that they can make micro adjustments to society and the economy and create better outcomes. What they’re missing is that we’re dealing with people, so it’s not truly mechanistic. But, just because it’s not truly mechanistic doesn’t mean that there aren’t patterns to it and regularities. There are regularities to the economy. But better understanding can be directly derived from us as people, and also from what we do, and especially our actions. We’re always trying to attain some value that we think is valuable enough for us to pursue. That’s the axiom that Mises develops with praxeology, and that explains this really well. The problem in economics now is that they have completely thrown out subjective value. Now they start with using proxies by looking at money price instead of subjective value because it fits their models better.

But now they don’t even know that there is such a thing. I was fortunate, I suppose. I took my advanced microeconomics course at Missouri, and was taught in the economics department and not in the ag commerce department. That professor started by saying, “we know that value is subjective. Assuming that we could still plot it in the utility function and use utils, we should be able to maximize it as well.” Then he started filling the blackboard with one big equation and the rest of the semester was trying to maximize this equation with using partial derivatives of different variables. He was part of the old guard in the sense that he recognized that value is subjective, but he just chose to disregard it. Whereas now, I don’t think there are any economists being trained in economics programs, at least not in the classical sense, because they are now technocrats. They don’t think about economic issues. They think about how to program different statistics programs and how to check their results for biases and then they come up with some clever explanation for their findings. They use economic terminology, but there’s really no economic understanding behind that at all. They’re trying to predict and they’re trying to get into a career in government basically, trying to help policymakers produce better policy, which is very different from the type of economics that we do in Austrian economics.

We’re trying to understand the world and help people become better people. We’re not trying to push people around the way you do with policy and always create new problems because that’s what policy ends up doing. There are both large and small problems, but still problems. This is because there are unintended consequences. They assume that people are not people. In other words, we can tell a story about what is actually going on, that people can understand and learn from.Real life entrepreneurs, they understand Austrian economics, they just don’t have the tools, the terminology or the theory. They have the experience telling them exactly what we know — that is Austrian economic theory is correct in how it explains the market economy and how it works. That’s how we can explain all these problems that come out of policy and all these errors made by politicians. We can, in this sense, predict or at least foresee all the suffering that people will have to go through simply because they want these quick fixes through policy that have never worked and will never work. Economics is a social science, but it’s definitely also a tool for uncovering the true state of the world and the true dynamics of the world. At present, there are really two categories of people who understand the world and understand the economy and those are experienced entrepreneurs and Austrian economists.

JD: Is it an overstatement to say most mainstream economists have no concept or theory of the entrepreneur at all? They think individuals are interchangeable widgets?

PB: The way they treat entrepreneurship is to look at startups. For these economists, the aggregate number of businesses and jobs being created is all they’re interested in. They have no conception of the entrepreneur as a person, or the entrepreneur’s function in the economy beyond just jobs creation. It makes me think of the famous Schumpeter quote about how studying the economy without the entrepreneurs is really Hamlet without the Danish prince.

The Roots of the Federal Reserve

Murray N. Rothbard — Mon, 04 Nov 2019 16:15:00 -0600

Includes a Question & Answer Period. Recorded at "The Federal Reserve: History, Theory and Practice," hosted by the Mises Institute at Jekyll Island, Georgia; September 4-7, 1986.

Titus Gebel Discusses His Legal Proposals for Free Private Cities

Robert P. Murphy, Titus Gebel — Mon, 04 Nov 2019 15:30:00 -0600

Titus Gebel has a PhD in international law, and has written a book, Free Private Cities: Making Governments Compete For You. Bob discusses Titus’ proposal and how it differs from other types of abstract libertarian theorizing.

For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.

What Is the Free Market?

Murray N. Rothbard — Mon, 04 Nov 2019 14:00:00 -0600

The Free Market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services. Thus, when I buy a newspaper from a news dealer for fifty cents, the news dealer and I exchange two commodities: I give up fifty cents, and the news dealer gives up the newspaper. Or if I work for a corporation, I exchange my labor services, in a mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire.

Both parties undertake the exchange because each expects to gain from it. Also, each will repeat the exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in the recent past. Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.

This simple reasoning refutes the argument against free trade typical of the "mercantilist" period of sixteenth- to eighteenth-century Europe, and classically expounded by the famed sixteenth-century French essayist Montaigne. The mercantilists argued that in any trade, one party can benefit only at the expense of the other, that in every transaction there is a winner and a loser, an "exploiter" and an "exploited." We can immediately see the fallacy in this still-popular viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern game-theory jargon, trade is a win-win situation, a "positive-sum" rather than a "zero-sum" or "negative-sum" game.

How can both parties benefit from an exchange? Each one values the two goods or services differently, and these differences set the scene for an exchange. I, for example, am walking along with money in my pocket but no newspaper; the news dealer, on the other hand, has plenty of newspapers but is anxious to acquire money. And so, finding each other, we strike a deal.

Two factors determine the terms of any agreement: how much each participant values each good in question, and each participant's bargaining skills. How many cents will exchange for one newspaper, or how many Mickey Mantle baseball cards will swap for a Babe Ruth, depends on all the participants in the newspaper market or the baseball card market — on how much each one values the cards as compared to the other goods he could buy. These terms of exchange, called "prices" (of newspapers in terms of money, or of Babe Ruth cards in terms of Mickey Mantles), are ultimately determined by how many newspapers, or baseball cards, are available on the market in relation to how favorably buyers evaluate these goods. In shorthand, by the interaction of their supply with the demand for them.

Given the supply of a good, an increase in its value in the minds of the buyers will raise the demand for the good, more money will be bid for it, and its price will rise. The reverse occurs if the value, and therefore the demand, for the good falls. On the other hand, given the buyers' evaluation, or demand, for a good, if the supply increases, each unit of supply — each baseball card or loaf of bread — will fall in value, and therefore, the price of the good will fall. The reverse occurs if the supply of the good decreases.

The market, then, is not simply an array, but a highly complex, interacting latticework of exchanges. In primitive societies, exchanges are all barter or direct exchange. Two people trade two directly useful goods, such as horses for cows or Mickey Mantles for Babe Ruths. But as a society develops, a step-by-step process of mutual benefit creates a situation in which one or two broadly useful and valuable commodities are chosen on the market as a medium of indirect exchange. This money-commodity, generally but not always gold or silver, is then demanded not only for its own sake, but even more to facilitate a re-exchange for another desired commodity. It is much easier to pay steelworkers not in steel bars, but in money, with which the workers can then buy whatever they desire. They are willing to accept money because they know from experience and insight that everyone else in the society will also accept that money in payment.

The modern, almost infinite latticework of exchanges, the market, is made possible by the use of money. Each person engages in specialization, or a division of labor, producing what he or she is best at. Production begins with natural resources, and then various forms of machines and capital goods, until finally, goods are sold to the consumer. At each stage of production from natural resource to consumer good, money is voluntarily exchanged for capital goods, labor services, and land resources. At each step of the way, terms of exchanges, or prices, are determined by the voluntary interactions of suppliers and demanders. This market is "free" because choices, at each step, are made freely and voluntarily.

The free market and the free price system make goods from around the world available to consumers. The free market also gives the largest possible scope to entrepreneurs, who risk capital to allocate resources so as to satisfy the future desires of the mass of consumers as efficiently as possible. Saving and investment can then develop capital goods and increase the productivity and wages of workers, thereby increasing their standard of living. The free competitive market also rewards and stimulates technological innovation that allows the innovator to get a head start in satisfying consumer wants in new and creative ways.

Not only is investment encouraged, but perhaps more important, the price system, and the profit-and-loss incentives of the market, guide capital investment and production into the proper paths. The intricate latticework can mesh and "clear" all markets so that there are no sudden, unforeseen, and inexplicable shortages and surpluses anywhere in the production system.

But exchanges are not necessarily free. Many are coerced. If a robber threatens you with "Your money or your life," your payment to him is coerced and not voluntary, and he benefits at your expense. It is robbery, not free markets, that actually follows the mercantilist model: the robber benefits at the expense of the coerced. Exploitation occurs not in the free market, but where the coercer exploits his victim. In the long run, coercion is a negative-sum game that leads to reduced production, saving, and investment, a depleted stock of capital, and reduced productivity and living standards for all, perhaps even for the coercers themselves.

Government, in every society, is the only lawful system of coercion. Taxation is a coerced exchange, and the heavier the burden of taxation on production, the more likely it is that economic growth will falter and decline. Other forms of government coercion (e.g., price controls or restrictions that prevent new competitors from entering a market) hamper and cripple market exchanges, while others (prohibitions on deceptive practices, enforcement of contracts) can facilitate voluntary exchanges.

The ultimate in government coercion is socialism. Under socialist central planning the socialist planning board lacks a price system for land or capital goods. As even socialists like Robert Heilbroner now admit, the socialist planning board therefore has no way to calculate prices or costs or to invest capital so that the latticework of production meshes and clears. The current Soviet experience, where a bumper wheat harvest somehow cannot find its way to retail stores, is an instructive example of the impossibility of operating a complex, modern economy in the absence of a free market. There was neither incentive nor means of calculating prices and costs for hopper cars to get to the wheat, for the flour mills to receive and process it, and so on down through the large number of stages needed to reach the ultimate consumer in Moscow or Sverdlovsk. The investment in wheat is almost totally wasted.

Market socialism is, in fact, a contradiction in terms. The fashionable discussion of market socialism often overlooks one crucial aspect of the market. When two goods are indeed exchanged, what is really exchanged is the property titles in those goods. When I buy a newspaper for fifty cents, the seller and I are exchanging property titles: I yield the ownership of the fifty cents and grant it to the news dealer, and he yields the ownership of the newspaper to me. The exact same process occurs as in buying a house, except that in the case of the newspaper, matters are much more informal, and we can all avoid the intricate process of deeds, notarized contracts, agents, attorneys, mortgage brokers, and so on. But the economic nature of the two transactions remains the same.

This means that the key to the existence and flourishing of the free market is a society in which the rights and titles of private property are respected, defended, and kept secure. The key to socialism, on the other hand, is government ownership of the means of production, land, and capital goods. Thus, there can be no market in land or capital goods worthy of the name.

Some critics of the free-market argue that property rights are in conflict with "human" rights. But the critics fail to realize that in a free-market system, every person has a property right over his own person and his own labor, and that he can make free contracts for those services. Slavery violates the basic property right of the slave over his own body and person, a right that is the groundwork for any person's property rights over nonhuman material objects. What's more, all rights are human rights, whether it is everyone's right to free speech or one individual's property rights in his own home.

A common charge against the free-market society is that it institutes "the law of the jungle," of "dog eat dog," that it spurns human cooperation for competition, and that it exalts material success as opposed to spiritual values, philosophy, or leisure activities. On the contrary, the jungle is precisely a society of coercion, theft, and parasitism, a society that demolishes lives and living standards. The peaceful market competition of producers and suppliers is a profoundly cooperative process in which everyone benefits, and where everyone's living standard flourishes (compared to what it would be in an unfree society). And the undoubted material success of free societies provides the general affluence that permits us to enjoy an enormous amount of leisure as compared to other societies, and to pursue matters of the spirit. It is the coercive countries with little or no market activity, notably under communism, where the grind of daily existence not only impoverishes people materially, but deadens their spirit.

The Fight Against "Home Sharing" Drives up the Price of Short-Term Housing

Lee Friday — Mon, 04 Nov 2019 11:00:00 -0600

City Council in London, Ontario recently decided to explore their options for regulating “short-term rentals” arranged through companies such as Airbnb, HomeAway, etc. The motion was brought forward by Councillor Anna Hopkins, who is concerned about (a) complaints from residents about short-term-renters’ noisy parties, and (b) “the role those short-term rentals have on taking potential long-term housing options out of the market.” Hopkins is concerned (video 1:31:27) that non-owner-occupied residences are being “used as hotels.”

This is a strange action for Council to take because (a) the city already has a noise by-law, and (b) Council itself is guilty of prohibiting numerous long-term affordable housing options, and (c) short-term rentals include hotels, but they get a free pass.

Noisy Parties

Regarding noisy parties, Councillor Hopkins said (video 1:31:27):

“There’s no one really there to … make sure that … the concerns in the neighbourhood are being met other than just calling the police …”

This reveals a complete lack of awareness on the part of Hopkins as well as her fellow Councillors who did not challenge her statement. The fact is that the city already has a sound by-law, with enforcement “split between the City of London and the London Police Service.” Therefore, the City and the police are supposed to be “the ones who are really there” to enforce a by-law which includes stiff penalties for contravention.

Instead of proposing new regulations, Hopkins and her fellow councillors should be asking why the current law is not being enforced.

Affordable Housing

The lack of a sufficient supply of affordable housing is largely due to meddlesome policies from all levels of government.

Housing is a classic example of how government policies are rarely consistent with its professed desire for economic growth. In London, as in most cities, municipal regulations (zoning, heritage designations, etc.) prevent the market from constructing enough housing to meet the demands of consumers, thereby restricting economic activity and forcing up prices. This is a basic cause and effect set of circumstances. As economist Thomas Sowell wrote: “… A century ago, virtually any economist could have explained why preventing housing from being built would lead to higher rents …”

Faced with a choice between (a) providing affordable housing through an unhampered market, or (b) providing insufficient and expensive housing through government intervention, the government chooses the latter.

Hotels

In Toronto, which is also trying to limit and regulate short-term-rentals, we hear this:

"Regulating short-term rentals will increase housing affordability and accessibility, and we think with Toronto's housing crisis, that is needed right now," noted lawyer Monica Poremba, who is representing Fairbnb Canada [FBC], a national coalition calling for regulations around home-sharing. [emphasis added]

And Toronto City Hall says:

“… the regulations are important to maintain the accessibility and affordability of long-term rental options as the city faces an acute housing crunch.” [emphasis added]

A “housing crisis.” An “acute housing crunch.” Those words describe a dire situation. City Hall and FBC’s position is clear: The needs of tourists are a lower priority than the needs of permanent residents who lack access to affordable housing.

But if the needs of permanent residents are more important than the needs of tourists, why is the government not doing more than simply limiting the number of short-term rentals? Why not prohibit them entirely, including hotels which could be converted into condos or apartments, thus adding to the stock of long-term rental options? This is the only course of action the government can take which would be consistent with its premise that the needs of permanent residents must take priority.

But politicians are not pursuing this course of action, which means their motives are not altruistic, as they would have us believe. Instead, they arbitrarily pick the winners and losers. And it is clear that hotels – whose revenues will rise by limiting their short-term-rental competition – have far more political influence than do individual Airbnb landlords. Accordingly, for all their supposed concern about long-term housing affordability, it is worth noting that FBC “has been dubbed a hotel industry lobbying group by its critics.”

Tourism

Short-term-rental regulations also conflict with the government’s tourism policy. London City Hall claims to support tourism, noting “the major contribution tourism makes to the local economy and our general well-being.” However, if City Hall gets its way, London’s short-term-rental regulations might mirror what the City of Toronto is attempting, which is to restrict “rentals to an owner’s principal residence and requiring short-term renters to register with the city and pay a four-per-cent municipal accommodation tax.”

You don’t need a degree in economics to understand that these regulations would reduce the options available to tourists, thereby raising prices and benefiting hotels. And because most tourists are price-sensitive, we would likely witness a decline in “the major contribution tourism makes to the local economy and our general well-being.” Yet another example of politicians speaking out of both sides of their mouths.

Surprise Billing: What the Policy Wonks Don’t Get

Anish Koka — Mon, 04 Nov 2019 10:30:00 -0600

Do hospital-based physicians benefit from being out-of-network? Are policy wonks who attack “surprise billing” fully aware of the relevant factors? In this second episode on this topic, Dr. Koka leads a conversation with our guest, Dr. Amy Cho, an emergency physician from Minnesota.

Dr. Cho graduated from the University of Michigan with a joint MD/MBA and completed her residency in Emergency Medicine at Advocate Christ Medical Center in Chicago. Prior to medical school, she worked as a management consultant with Bain & Co., and as a product manager with Convio, a venture-funded software company.

Can We Win the Battle for Sound Money?

Ron Paul — Mon, 04 Nov 2019 09:00:00 -0600

Includes an introduction by Lew Rockwell. Recorded at "The Federal Reserve: History, Theory and Practice," hosted by the Mises Institute at Jekyll Island, Georgia; September 4-7, 1986.

The Economics and Politics of Zoning

Ash Navabi — Mon, 04 Nov 2019 06:00:00 -0600

Both economic decisions and political decisions involve choices and tradeoffs. The difference is that economic decisions are ultimately informed and rely upon monetary prices, revenues and costs. Political decisions, meanwhile, do not depend on market outcomes—they can be based on love, legacy, favors, or establishing power relations.

Zoning is the practice of governments controlling the type, size, and population density of buildings. (Zoning should not be confused with building codes, which control the building materials and other design aspects of buildings.) The purpose of zoning has been to create separate regional “zones” of building types: broadly, these categories typically include residential, industrial, retail, and parks. The zones are then broken down into more minute categories, like low, medium, and high density homes, different kinds of retail businesses, and so on.

Zoning is a type of government intervention into economic decision making: it the practice of the state (whether it is the municipality, subnational, or national level) intervening in the affairs of private individuals in where and what they can build. By intention, zoning is a limit on the supply of housing. In effect, it is a limit on the quantity of the stock of housing; that is, it acts like any other quota or prohibition.

While many economists, from Rothbard himself, to even those in the mainstream, recognize the deleterious effects of zoning, there does not exist a single, thoroughgoing Austrian analysis on the subject. The purpose of this piece is to be that analysis. It is broken up into two sections: the politics of zoning, and the economics of zoning.

The Politics of Zoning

The economist Ludwig von Mises marked a distinction of ownership under the principle of violence, and ownership under the principle of contract.1 Under the principle of violence, ownership constitutes physical possession only. A person no longer owns a thing if someone stronger takes it from them via violence. It can be best expressed by Tacticus’s description of the young men of ancient Germania: “they actually think it tame and stupid to acquire by the sweat of toil what they might win by their blood.”2 The principle of violence is a policy of arbitrary chaos over peace.

Conditions are different under the principle of contract. Once it is recognized that the stability of ownership is a beneficial institution and ought to be maintained, the principle of contract emerges. Under a policy of contract, voluntary exchanges of property become the norm.

Zoning, as it is commonly understood, is a policy of the state. The state, despite its appeals to democracy, consultation, public reason, and the like, is fundamentally an institution that operates under the principle of violence. Its laws and ordinances are always backed by the threat of violence. It is zoning under the principle of violence that is under investigation in this essay.

It is important to note that land use restrictions can be an outcome of voluntary, contractual agreement as well. A condominium tower is often governed by a corporation made up of the individual owners of the units of the building. The condominium corporation could, if it wishes, limit commercial activity within units, subdividing units, renting units for short periods, limiting animals, and so on. The corporation would, in effect, be governed by a constitution, which would have been consented upon unanimously by the original owners. The terms of the constitution/contract may even allow future owners certain rights and protocols on how to change the terms.

Murray Rothbard created a taxonomy for violent interventions into economic affairs,3 using three broad categories: autistic interventions, binary interventions, and triangular interventions. An autistic intervention is one where the intervenor controls what the victim can and cannot do with their own property. In the case of a binary intervention, the victim is directly forced into an exchange with the intervenor. In a triangular intervention, the intervenor, A, dictates the terms under which a pair of victims B and C may exchange with each other.

The Economics of Zoning

By limiting the quantity of new housing that can be built, zoning gives existing owners of limited structures (be it housing, factories, or office space) a “monopolistic” privilege. As the history of government zoning has always been to limit the construction of new homes, those lucky enough to already own homes will have competition from other homesellers artificially restricted by government regulation. We can derive several political and economic consequences from this state of affairs.

Zoning Limits The Quantity Available for Sale.

Zoning prevents property owners from doing what they wish with their property. The express purpose of zoning is an indirect limit on the precise number of new dwellings or businesses in an area. It is only effective, though, if it limits development that otherwise would have occurred; it does this by satisfying two conditions. The first condition is that the population has to be growing. The second condition is that zones limit uses that otherwise would have occurred.

By zoning land exclusively for residential use, businesses that may have been desired by the community are not supplied. By zoning residential land exclusively for single family homes, less land is available for multi-family arrangements.

Of course, by designating land for strictly residential use, less land becomes available for commercial use. This also causes increases in commercial land prices, and subsequent space. Zoning is an arbitrary reorganization of the economy of land. Land that would be useful for many people living in a smaller area is prohibited by law in preference for fewer people living on a larger area. Land that would be useful as a commercial enterprise is prohibited by law in favour of residential usage. Land that would be useful as a residential area is prohibited by law in favour of factories, parks, or other empty uses of land.

Zoning is, in fact, two forms of quantity control: it both (partially) prohibits new real estate developments from where they would be most economical, to where the ordinance decrees they should be built; and it also grants monopoly privileges as well. Zoning achieves the latter through the convoluted, byzantine processes that inevitably arise in order to approve any new development. These processes will require entrepreneurs to hire of specialist lawyers and quasi-lawyers to navigate a successful approval. The city itself will also have to hire more bureaucrats to deal with the increasing complexity of the zoning ordinances as well. Effectively, this creates a legal barrier to entry for smaller or less politically connected firms. This entrenches the incumbent developers, essentially raising their status to that of monopolist.

This limits not only the means of production, but the means of satisfaction, and so both buyers and sellers are made worse off.

Zoning Causes Higher Prices.

It is this reduction in supply of land that causes an increase in prices. Just like any other situation where a lack of availability results in higher prices, so too is the case in land. Furthermore, in a situation where there is still a growing demand to live in the city, the lower quantities available for purchase will result in higher prices immediately, and will increase inequalities within society over time.

Keep in mind that what causes the lack of availability is both the prohibition on free development, as well as the monopolistic/oligopolistic situation that arises from the legal system. The prohibition results in the ordinary reduction of quantity. The regulation-created oligopoly has then a further incentive to reduce its output, to enjoy even greater profits.

These great suppressing pressures on quantity will only contribute to a further acceleration of prices. It will feed a “speculative frenzy”, where seemingly anyone who can invest in real estate gets rich. Eventually, two classes of people will be created: those who have been priced out of the market, and must move to the suburbs or other cities; and those who had the means or the luck to enter the market.

Zoning Promotes Black Markets.

Legal limits to trade only serve as an increase in the cost of doing business. For some, the expected benefits will still exceed the expected costs. In the case of zoning, black markets will exist for both homes and businesses.

Black market homes effectively mean that more people will live in one dwelling than the legal maximum. It results in overcrowded housing. In many jurisdictions today, a dwelling is defined based on a minimum number of privately accessible kitchens and bathrooms. In black market housing, many adults will share the same kitchens and bathrooms. These conditions per se are not problematic. What is problematic is that tenants and landlords who engage in illegal behaviour tend to shirk other duties and responsibilities as well. Often, these means that landlords will not take the proper safety precautions with their overcrowded homes. Tenants, on the other hand, will not do their part in keeping the residence clean.

This combination of untidy conditions, coupled with lackadaisical safety precautions create dangerous conditions for the tenants. Fires are more likely, and would be more deadly as well. It’s important to note that these conditions are not entirely due to unethical disregard for human life. In some cases, it may be that undertaking safety-enhancing renovations will result in the permanent eviction of the residents: a fire department may be called in to inspect the structural safety of a home, but instead the home is reported for a zoning violation. This was exactly the case in a recent episode in Toronto.4

Landlording is not the only business someone can run out of their home that violates zoning bylaws. In North America, zones explicate what kinds of non-residential enterprises are permissible within a zone. Indeed, the origins of zoning bylaws were expressly to prohibit home-based laundromats in California. Residential zones typically allow libraries and care facilities, and not much else. Thus, if someone wanted to offer baked goods out of their home, they would be in violation of the ordinances. They would have to save or borrow more money than otherwise, in order to start their business.

By increasing the cost of doing business, less business takes place. Fewer goods of all kinds are created, brought to market, exchanged for, and benefit consumers and producers alike. As the unavailability of homes leads to instances of homelessness, bidding wars, and overcrowded living conditions becoming more prevalent, councillors now have two choices: they can either roll back the restrictive policies, or introduce new interventions into the market.

Zoning Promotes Increases in the Quality of Legal Housing

These rising prices, due to reduced quantities for sale, result in increases in quality as well. New developments feature “luxury” finishes that are relatively cheap to manufacture, but fetch a high price. Older homes are remodeled and upgraded and “flipped” in order to sell at higher prices, as opposed to being sold as is, or being rented out to low income families. This makes it harder for lower income households to live (and subsequently work) in the city.

Zoning Will Require More Interventions.

Due to the complicated, time-intensive nature of the inefficiencies of zoning, it becomes difficult to ascertain cause and effect among the public. As a result, other sources will be erroneously blamed as the cause of the social ills listed above. Typical scapegoats include speculators, greed, and general market failures. To this end, more interventions will be introduced in the form of price controls (like speculation taxes and rent control), and other quantity controls--like “inclusionary zoning” requirements, which require developers to give up part of their land or property for low-income housing.

There is also a concept called “density bonusing.” Under the mantra of “growth must pay for growth”, those seeking to build in excess of the limits set by zoning ordinances must pay a fine to the governing body. The fine may be a direct tax or in-kind benefits for the state, or in the case of Toronto, it may even be a requirement to buy art valued as a fixed percentage of the gross construction costs.5

As each new intervention will bring with it new inefficiencies, there will be an increase in calls for even further interventions. What's more, is that the new interventions will eventually become contradictory. Politicians have to satisfy both the consumers’ demands for lower prices, as well as the producers’ demands for higher prices.

Just as government now imposes both a “sin tax” for cigarettes (to discourage the negative health and social effects), while at the same time subsidizing tobacco farmers,6 so too can we come to expect some “sinful” selling or buying of homes to be taxed, while others will be encouraged to buy and sell homes. Indeed, we already see this happening: in the name of preventing prices from rising, foreign buyers are subject to a special tax in Ontario; meanwhile, first-time home buyers are subject to special tax exemptions, that allow them to bid up prices anyway.

Finally, as each new intervention accrues, taxes must be raised higher and higher to support their enforcement. At the same time, the prohibitions on development continue to cause an increase in prices. This reveals the true nature of zoning, as with all other restrictions on production. Ultimately, they are policies on social expenditures.7 As such, if the policy was strictly to support home values, this end could be achieved much cheaper and less intrusively with a direct subsidy to homeowners (or, equivalently, a direct subsidy to home buyers).

What’s more, is that any proposals to fight against these interventions will be fiercely rejected by what has been dubbed as the “iron triangle of beneficiaries, politicians, and bureaucrats.” The beneficiaries of zoning are those homeowners, developers, and army of ordinance navigators that have benefited directly from the law. The politicians are, in turn, kept in power by appeasing these beneficiaries. The bureaucrats are hired by the politicians.

Conclusion: Zoning Makes Everyone Worse Off

Operating under the principle of violence, government zoning is an intervention on multiple fronts. It is an autistic intervention, in that it prohibits property owners from using their own property as they see fit. It is a binary intervention, in that requires conciliatory fees and even property in exchange for permission to build. It is also a triangular intervention in that it prohibits parties to contract freely with each other.

Many will say that zoning creates winners and losers. The winners are those who have been able to buy property at low prices, while the losers are those who were unlucky in when they tried to enter the market. The analysis above rejects this possibility.

It's not the case, either, that the benefits that accrue to the protected class “outweigh” the losses of others: While some do indeed become very rich, much richer than perhaps they would have been under a free market, by restricting development, zoning restricts overall incomes. It is a restriction on trade, and thus a restriction on the division of labor, the extent of the market, and the ability for entrepreneurs to satisfy the most urgent needs of consumers. As people will be forced to spend more of their income and wealth on procuring housing, they will have less money to buy other goods and services. The became house rich, but cash poor. What’s more, as more lower income people are zoned out of the market, fewer people will be available to work low wage jobs. However, the relative cash poverty of the denizens of the city will not enable to rise up enough to attract more workers.

So even though only progressively richer people will be able to move to and live in the city, the relative high cost of housing will capture most of the new wealth. This leaves less money for restaurants, nightclubs, and other every luxuries. Thus, relative to the incomes of people living in the city, prices will be higher for ordinary goods and services. At the same time, the dearth of savings and investment in other lines of production will mean that new goods and services will take longer to come to market.

Zoning lowers the incomes, savings, investment opportunities, and innovation potential for the whole of society. Over time, these functions would have accrued benefits to everyone. So, while on a first glance zoning enriches the few at the expense of the many, it must also be true that zoning makes everyone poorer over the long run.

1. Mises, Ludwig von. Socialism: An Economic and Sociological Analysis. (1962 [1922]).
2. Tacitus. The Origin and the Situation of the Germans. (1876).
3. Rothbard, Murray N. Power and Market. (2004 [1970]), pp. 11-13.
4. Galbraith, Sean. “I don’t normally tweet about projects I work on, but when it involves a Committee of Adjustment denying a variance to maintain an entirely existing (not legal) triplex containing 3 units of affordable housing bc the new owner wanted the fire department to make sure it was safe…”. Tweet thread. December 13, 2018. https://twitter.com/PlannerSean/status/1073289278308773888
5. Toronto Realty Blog. “What Is The “Percent For Public Art Program?”“ January 26, 2018. https://torontorealtyblog.com/blog/percent-public-art-program/
6. Physicians for a Smoke-Free Canada. “Tobacco Production in Canada: Revenues and Government Subsidies.” No date given. http://www.smoke-free.ca/pdf_1/Agricultural%20Subsidies%20to%20Tobacco%20-%20Canada.pdf
7. See Chapter I of: Mises, Ludwig von. Interventionism: An economic analysis. Indianapolis: Liberty Fund. 2011. https://oll.libertyfund.org/titles/mises-interventionism-an-economic-analysis

Trotsky: The Ignorance and the Evil

Ralph Raico — Sat, 02 Nov 2019 14:00:00 -0500

[Leon Trotsky • By Irving Howe • Viking Press, 1978 &bull 214 pages. This review originally appeared in Libertarian Review, March 1979.]

Leon Trotsky has always had a certain appeal for intellectuals that the other Bolshevik leaders lacked. The reasons for this are clear enough. He was a writer, an occasional literary critic — according to Irving Howe, a very good one — and an historian (of the revolutions of 1905 and 1917). He had an interest in psychoanalysis and modern developments in physics, and, even when in power, suggested that the new Communist thought-controllers shouldn't be too harsh on writers with such ideas — not exactly a Nat Hentoff position on freedom of expression, but about as good as one can expect among Communists.

Above all, Trotsky was himself an intellectual, and one who played a great part in what many of that breed have considered to be the real world — the world of revolutionary bloodshed and terror. He was second only to Lenin in 1917; in the Civil War he was the leader of the Red Army and the Organizer of Victory. As Howe says, "For intellectuals throughout the world there was something fascinating about the spectacle of a man of words transforming himself through sheer will into a man of deeds."

Trotsky lost out to Stalin in the power struggle of the 1920s, and in exile became a severe and knowledgeable critic of his great antagonist; thus, for intellectuals with no access to other critics of Stalinism — classical liberal, anarchist, or conservative — Trotsky's writings in the 1930s opened their eyes to some aspects at least of the charnel-house that was Stalin's Russia. During the period of the Great Purge and the Moscow show trials, Trotsky was placed at the center of the myth of treason and collaboration with Germany and Japan that Stalin spun as a pretext for eliminating his old comrades. In 1940, an agent of the Soviet secret police, Ramon Mercador, sought Trotsky out at his home in Mexico City and killed him with an ice ax to the head.

Irving Howe, the distinguished literary critic and editor of Dissent, tells the story of this interesting life with great lucidity, economy, and grace. The emphasis is on Trotsky's thought, with which Howe has concerned himself for almost the past 40 years. As a young man, he states, "I came for a brief time under Trotsky's influence, and since then, even though or perhaps because I have remained a socialist, I have found myself moving farther and farther away from his ideas."

Howe is in fact considerably more critical of Trotsky than I had expected. He identifies many of Trotsky's crucial errors, and uses them to cast light on the flaws in Marxism, Leninism, and the Soviet regime that Trotsky contributed so much to creating. And yet there is a curious ambivalence in the book. Somehow the ignorance and evil in Trotsky's life are never allowed their full weight in the balance, and, in the end, he turns out to be, in Howe's view, a hero and "titan" of the 20th century. It's as if Howe had chosen not to think out fully the moral implications of what it means to have said and done the things that Trotsky said and did.

We can take as our first example Howe's discussion of the final outcome of Trotsky's political labors: the Bolshevik revolution and the Soviet regime. Throughout this book Howe makes cogent points regarding the real class character of this regime and other Communist governments — which, he notes, manifested itself very early on:

A new social stratum — it had sprung up the very morning of the revolution — began to consolidate itself: the party-state bureaucracy which found its support in the technical intelligentsia, the factory managers, the military officials, and, above all, the party functionaries…. To speak of a party-state bureaucracy in a country where industry has been nationalized means to speak of a new ruling elite, perhaps a new ruling class, which parasitically fastened itself upon every institution of Russian life. [emphasis in original]

Howe goes on to say that it was not to be expected that the Bolsheviks themselves would realize what they had done and what class they had actually raised to power: "It was a historical novelty for which little provision had been made in the Marxist scheme of things, except perhaps in some occasional passages to be found in Marx's writings about the distinctive social character of Oriental despotism."

This is not entirely correct. Howe himself shows how Trotsky, in his book 1905 (a history of the Russian revolution of that year), had had a glimpse of this form of society, one in which the state bureaucracy was itself the ruling class. In analyzing the Tsarist regime, Trotsky had picked up on the strand of Marxist thought that saw the state as an independent parasitic body, feeding on all the social classes engaged in the process of production. This was a view that Marx expressed, for instance, in his Eighteenth Brumaire of Louis Bonaparte.

More importantly, the class character of Marxism itself — as well as the probable consequences of the coming to power of a Marxist Party — had been identified well before Trotsky's time. The great 19th-century anarchist Michael Bakunin — whose name does not even appear in Howe's book, just as not a single other anarchist is even mentioned anywhere in it — had already subjected Marxism to critical scrutiny in the 1870s. In the course of this, Bakunin had uncovered the dirty little secret of the future Marxist state:

The State has always been the patrimony of some privileged class or other; a priestly class, an aristocratic class, a bourgeois class, and finally a bureaucratic class…. But in the People's State of Marx, there will be, we are told, no privileged class at all … but there will be a government, which will not content itself with governing and administering the masses politically, as all governments do today, but which will also administer them economically, concentrating in its own hands the production and the just division of wealth, the cultivation of land, the establishment and development of factories, the organization and direction of commerce, finally the application of capital to production by the only banker, the State. All that will demand an immense knowledge and many "heads overflowing with brains" in this government. It will be the reign of scientific intelligence, the most aristocratic, despotic, arrogant, and contemptuous of all regimes. There will be a new class, a new hierarchy of real and pretended scientists and scholars. [Emphasis added.]

This perspective was taken up somewhat later by the Polish-Russian revolutionist, Waclaw Machajski, who held, in the words of Max Nomad, that — "nineteenth century socialism was not the expression of the interests of the manual workers but the ideology of the impecunious, malcontent, lower middle-class intellectual workers … behind the socialist 'ideal' was a new form of exploitation for the benefit of the officeholders and managers of the socialized state."

Thus, that Marxism in power would mean the rule of state functionaries was not merely intrinsically probable — given the massive increment of state power envisaged by Marxists, what else could it be? — but it had also been predicted by writers well known to a revolutionary like Trotsky. Trotsky, however, had not permitted himself to take this analysis seriously before committing himself to the Marxist revolutionary enterprise. More than that: "To the end of his days," as Howe writes, he "held that Stalinist Russia should still be designated as a 'degenerated workers' state' because it preserved the nationalized property forms that were a 'conquest' of the Russian Revolution" — as if nationalized property and the planned economy were not the very instruments of rule of the new class in Soviet Russia!

"It may well be, that is, that the Bolsheviks had never had the slightest idea of what their aims would mean concretely for the economic life of Russia, how those aims would of necessity have to be implemented, or what the consequences would be."

It remained for some of Trotsky's more critical disciples, especially Max Shachtman in the United States, to point out to their master what had actually happened in Russia: that the Revolution had not produced a "workers' State," nor was there any danger that "capitalism" would be restored, as Trotsky continued to fret it would. Instead, there had come into an existence in Russia a "bureaucratic collectivism" even more reactionary and oppressive than what had gone before.

Trotsky rejected this interpretation. In fact he had no choice. For, as Howe states, the dissidents "called into question the entire revolutionary perspective upon which [Trotsky] continued to base his politics…. There was the further possibility, if Trotsky's critics were right, that the whole perspective of socialism might have to be revised." Indeed.

To his credit, Howe recognizes that a key period for understanding Bolshevism, including the thought of Trotsky, is the period of war communism, from 1918 to 1921. As he describes it, "Industry was almost completely nationalized. Private trade was banned. Party squads were sent into the countryside to requisition food from the peasants." The results were tragic on a vast scale. The economic system simply broke down, with all the immense suffering and all the countless deaths from starvation that such a small statement implies. As Trotsky himself later put it, "The collapse of the productive forces surpassed anything of the kind that history had ever seen. The country, and the government with it, were at the very edge of the abyss."

How had this come about? Here Howe follows the orthodox interpretation: War communism was merely the product of emergency conditions, created by the Revolution and the Civil War. It was a system of "extreme measures [which the Bolsheviks] had never dreamt of in their earlier programs."

Now, this last may be, strictly speaking, correct. It may well be, that is, that the Bolsheviks had never had the slightest idea of what their aims would mean concretely for the economic life of Russia, how those aims would of necessity have to be implemented, or what the consequences would be.

But war communism was no mere "improvisation," whose horrors are to be chalked up to the chaos in Russia at the time. The system was willed and itself helped produce that chaos. As Paul Craig Roberts has argued in his brilliant book Alienation and the Soviet Economy, war communism was an attempt to translate into "Reality" the Marxist ideal: the abolition of "commodity production," of the price system and the market.

This, as Roberts demonstrates, was what Marxism was all about. This is what the end of "alienation" and the final liberation of mankind consisted in. Why should it be surprising that when self-confident and determined Marxists like Lenin and Trotsky seized power in a great nation, they tried to put into effect the very policy that was their whole reason for being?

As evidence for this interpretation, Roberts quotes Trotsky himself (ironically, from a book of Trotsky's writings edited by Irving Howe):

[T]he period of so-called "war communism" [was a period when] economic life was wholly subjected to the needs of the front … it is necessary to acknowledge, however, that in its original conception it pursued broader aims. The Soviet government hoped and strove to develop these methods of regimentation directly into a system of planned economy in distribution as well as production. In other words, from "war communism" it hoped gradually, but without destroying the system, to arrive at genuine communism … reality, however, came into increasing conflict with the program of "war communism." Production continually declined, and not only because of the destructive action of the war.

Roberts goes on to quote Victor Serge: "The social system of those years was later called 'War Communism.' At the time it was called simply 'Communism' … Trotsky had just written that this system would last over decades if the transition to a genuine, unfettered Socialism was to be assured. Bukharin … considered the present mode of production to be final."

One slight obstacle was encountered, however, on the road to the abolition of the price system and the market: "Reality," as Trotsky noted, "came into increasing conflict" with the economic "system" that the Bolshevik rulers had fastened on Russia. After a few years of misery and famine for the Russian masses — there is no record of any Bolshevik leader having died of starvation in this period — the rulers thought again, and a New Economic Policy (NEP) — including elements of private ownership and allowing for market transactions — was decreed.

The significance of all this cannot be exaggerated. What we have with Trotsky and his comrades in the Great October Revolution is the spectacle of a few literary-philosophical intellectuals seizing power in a great country with the aim of overturning the whole economic system — but without the slightest idea of how an economic system works. In State and Revolution, written just before he took power, Lenin wrote,

The accounting and control necessary [for the operation of a national economy] have been simplified by capitalism to the utmost, till they have become the extraordinarily simple operations of watching, recording and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.

With this piece of cretinism Trotsky doubtless agreed. And why wouldn't he? Lenin, Trotsky, and the rest had all their lives been professional revolutionaries, with no connection at all to the process of production and, except for Bukharin, little interest in the real workings of an economic system. Their concerns had been the strategy and tactics of revolution and the perpetual, monkish exegesis of the holy books of Marxism.

The nitty-gritty of how an economic system functions — how, in our world, men and women work, produce, exchange, and survive — was something from which they prudishly averted their eyes, as pertaining to the nether-regions. These "materialists" and "scientific socialists" lived in a mental world where understanding Hegel, Feuerbach, and the hideousness of Eugen Duehring's philosophical errors was infinitely more important than understanding what might be the meaning of a price.

Of the actual operations of social production and exchange they had about the same appreciation as John Henry Newman or, indeed, St. Bernard of Clairvaux. This is a common enough circumstance among intellectuals; the tragedy here is that the Bolsheviks came to rule over millions of real workers, real peasants, and real businessmen.

Howe puts the matter rather too sweetly: once in power, he says, "Trotsky was trying to think his way through difficulties no Russian Marxist had quite foreseen." And what did the brilliant intellectual propose as a solution to the problems Russia now faced? "In December 1919 Trotsky put forward a series of 'theses' [sic] before the party's Central Committee in which he argued for compulsory work and labor armies ruled through military discipline…."

So, forced labor, and not just for political opponents, but for the Russian working class. Let Daniel and Gabriel Cohn-Bendit, the left-anarchists from the May days of 1968 in Paris, take up the argument:

"Was it so true," Trotsky asked, "that compulsory labor was always unproductive?" He denounced this view as "wretched and miserable liberal prejudice," learnedly pointing out that "chattel slavery, too, was productive" and that compulsory serf labor was in its times "a progressive phenomenon." He told the unions [at the Third Congress of Trade Unions] that "coercion, regimentation, and militarization of labor were no mere emergency measures and that the workers' State normally had the right to coerce any citizen to perform any work at any place of its choosing."

And why not? Hadn't Marx and Engels, in their ten-point program for revolutionary government in The Communist Manifesto, demanded as point eight, "Equal liability for all to labor. Establishment of industrial armies, especially for agriculture"? Neither Marx nor Engels ever disavowed their claim that those in charge of "the workers' state" had the right to enslave the workers and peasants whenever the need might arise. Now, having annihilated the hated market, the Bolsheviks found that the need for enslavement had, indeed, arisen. And of all the Bolshevik leaders, the most ardent and aggressive advocate of forced labor was Leon Trotsky.

There are other areas in which Howe's critique of Trotsky is not penetrating enough, in which it turns out to be altogether too soft-focused and oblique. For instance, he taxes Trotsky with certain philosophical contradictions stemming from his belief in "historical materialism." All through his life, Howe asserts, Trotsky employed "moral criteria by no means simply derived from or reducible to class interest. He would speak of honor, courage, and truth as if these were known constants, for somewhere in the orthodox Marxist there survived a streak of nineteenth century Russian ethicism, earnest and romantic."

Let us leave aside the silly implication that there is something "romantic" about belief in ethical values, as against the "scientific" character of orthodox Marxism. In this passage, Howe seems to be saying that adherence to certain commonly accepted values is, among Marxists, a rare kind of atavism on Trotsky's part. Not at all.

Of course historical materialism dismisses ethical rules as nothing more than the "expression," or "reflection," or whatever, of "underlying class relationships" and, ultimately, of "the material productive forces." But no Marxist has ever taken this seriously, except as pretext for breaking ethical rules (as when Lenin and Trotsky argued in justification of their terror). Even Marx and Engels, in their "Inaugural Address of the First International," wrote that the International's foreign policy would be to "vindicate the simple laws of morals and justice [sic] which ought to govern the relations of private individuals, as the laws paramount of the intercourse of nations."

"War communism was no mere 'improvisation,' whose horrors are to be chalked up to the chaos in Russia at the time. The system was willed and itself helped produce that chaos."

That Trotsky admired honor, courage, and truth is not something that cries out for explanation by reference to Russian tradition of "ethicism" (whatever that might be). The admiration of those values is a part of the common heritage of us all. To think that there is a problem here that needs explaining is to take "historical materialism" much too seriously to begin with.

Similarly with other contradictions Howe thinks he has discovered between Trotsky's Marxist philosophy and certain statements Trotsky made in commenting on real political events. Of the Bolshevik Revolution itself, Trotsky says that it would have taken place even if he had not been in Petrograd, "on condition that Lenin was present and in command." Howe asks, "What happens to historical materialism?" The point Howe is making, of course, is that in the Marxist view individuals are not allowed to play any critical role in shaping really important historical events, let alone in determining whether or not they occur.

But the answer to Howe's question is that, when Trotsky commits a blunder like this, nothing happens. Nothing happens, because "historical materialism" was pretentious nonsense from the beginning, a political strategy rather than a philosophical position. Occasionally, in daubing in some of the light patches of sky that are intended to make up for the dark ones in Trotsky's life, Howe comes perilously close to slipping into a fantasy world.

He says that in the struggle with Stalin, Trotsky was at a disadvantage, because he "fought on the terrain of the enemy, accepting the damaging assumption of a Bolshevik monopoly of power." But why is this assumption located on the enemy's terrain? Trotsky shared that view with Stalin. He no more believed that a supporter of capitalism had a right to propagate his ideas than a medieval inquisitor believed in a witch's right to her own personal style. And as for the rights even of other socialists — Trotsky in 1921 had led the attack on the Kronstadt rebels, who merely demanded freedom for socialists other than the Bolsheviks. At the time, Trotsky boasted that the rebels would be shot "like partridges" — as, pursuant to his orders, they were.

Howe even stoops to trying a touch of pathos. In sketching the tactics Stalin used in the struggle with Trotsky, he speaks of "the organized harassment to which Trotskyist leaders, distinguished Old Bolsheviks, were subjected by hooligans in the employ of the party apparatus, the severe threats made against all within the party…." Really now — is it political violence used against Leon Trotsky and his "distinguished" followers that is supposed to make our blood run cold? No: if there was ever a satisfying case of poetic justice, the "harassment" and "persecution" of Trotsky — down to and including the ice ax incident — is surely it.

The best example of Howe's strange gentleness toward Trotsky I have for the last. What, when all is said and done, was Trotsky's picture of the Communist society of the future? Howe does quote from Trotsky's Literature and Revolution the famous, and ridiculous, last lines: "The average human type [Trotsky wrote] will rise to the heights of an Aristotle, a Goethe, or a Marx. And above this ridge new peaks will rise." He doesn't, however, tell us what precedes these lines — Trotsky's sketch of the future society, his passionate dream. Under Communism, Trotsky states, Man will

reconstruct society and himself in accordance with his own plan…. The imperceptible, ant-like piling up of quarters and streets, brick by brick, from generation to generation, will give way to the titanic construction of city-villages, with map and compass in hand…. Communist life will not be formed blindly, like coral islands, but will be built up consciously, will be erected and corrected…. Even purely physiologic life will become subject to collective experiments. The human species, the coagulated Homo sapiens, will once more enter into a state of radical transformation, and, in his own hands, will become an object of the most complicated methods of artificial selection and psycho-physical training…. [It will be] possible to reconstruct fundamentally the traditional family life…. The human race will not have ceased to crawl on all fours before God, kings and capital, in order later to submit humbly before the laws of heredity and sexual selection! … Man will make it his purpose … to create a higher social biological type, or, if you please, a superman.

"Man … his own plan … his purpose… his own hands." When Trotsky promoted the formation of worker-slave armies in industry, he believed that his own will was the will of the Proletarian Man. It is easy to guess whose will would stand in for that of Communist Man when the time came to direct the collective experiments on the physiological life, the complicated methods of artificial selection and psycho-physiological training, the reconstruction of the traditional family, the substitution of "something else" for blind sexual selection in the reproduction of human beings, and the creation of the superhuman.

This, then, is Trotsky's final goal: a world where mankind is "free" in the sense that Marxism understands the term — where all of human life, starting from the economics, but going on to embrace everything, even the most private and intimate parts of human existence — is consciously planned by "society," which is assumed to have a single will. And it is this — this disgusting positivist nightmare — that, for him, made all the enslavement and killings acceptable!

Surely, this was another dirty little secret that Howe had an obligation to let us in on.

Howe ends by saying of Trotsky that "the example of his energy and heroism is likely to grip the imagination of generations to come," adding that, "even those of us who cannot heed his word may recognize that Leon Trotsky, in his power and his fall, is one of the titans of our century."

This is the kind of writing that covers the great issues of right and wrong in human affairs with a blanket of historicist snow. The fact is that Trotsky used his talents to take power in order to impose his willful dream — the abolition of the market, private property, and the bourgeoisie. His actions brought untold misery and death to his country.

Yet, to the end of his life, he tried in every way he could to bring the Marxist revolution to other peoples — to the French, the Germans, the Italians — with what probable consequences, he, better than anyone else, had reason to know. He was a champion of thought-control, prison camps, and the firing squad for his opponents, and of forced labor for ordinary, nonbrilliant working people. He openly defended chattel slavery — which, even in our century, must surely put him into a quite select company.

He was an intellectual who never asked himself such a simple question as: "What reason do I have to believe that the economic condition of workers under socialism will be better than under capitalism?" To the last, he never permitted himself to glimpse the possibility that the bloody, bureaucratic tyranny over which Stalin presided might never have come into existence but for his own efforts.

A hero? Well, no thank you — I'll find my own heroes somewhere else. A titan of the 20th century? In a sense, yes. At least Leon Trotsky shares with the other "titans" of our century this characteristic: it would have been better if he had never been born.

This review originally appeared in Libertarian Review, Vol. 8, No. 2 (March 1979), pp. 38–42.

Africa's Socialism Is Keeping it Poor

Germinal G. Van — Sat, 02 Nov 2019 11:00:00 -0500

It has been widely, vividly, but nonetheless wrongly believed that socialism is the appropriate system to improve the living standards of Africans. Worse yet, it has been misleadingly claimed that socialism is compatible with African culture because African culture is fundamentally a collectivist culture. However, one fact remains undisputable: socialism has failed wherever it was tried, and the African countries that have experimented with socialism were not exempted from its failure.

The undeniable fact remains that Africa has the lowest living standard of all continents after Antarctica. The reason why the living standard of the majority of African countries is so low compared to the rest of the world, is because socialism has impoverished the African continent. At the outset of the post-colonial era in the 1960s many African countries — such as Tanzania, Angola, Mali, Ethiopia, Ghana, Mozambique, Egypt, Senegal, Guinea, Congo and many more — have embraced socialism as their economic and political system. These countries that have embraced socialism became significantly worse off by the 1980s. For example, Tanzania was one of the fast-growing economies in East Africa until Julius Nyerere implemented the "Ujamaa," which means socialism and brotherhood in the Swahili language. Before the implementation of the Ujamaa; Tanzania had a GDP similar to South Korea . Subsequently to the implementation of Ujamaa, economic growth became unsurprisingly stagnant. The policy of collectivization impoverished the Tanzanian people. Food production fell, and the country’s economy suffered . This decline in productivity has made Tanzania one of the poorest countries on the continent. In Ghana, under the rule of Kwame Nkrumah, one of the foremost African political leaders of the post-colonial era; socialism was also implemented as the economic system of the country. Socialism, as a domestic policy in Nkrumah’s seven-year development plan, was to be pursued toward “a complete ownership of the economy by the state.” A bewildering slate of legislative controls and regulations were imposed on imports, capital transfers, industry, minimum wages, the rights and powers of trade unions, prices, rents and interest rates. Private businesses were taken away and nationalized by the Nkrumah government. The result has also been unsurprising. Resources were mismanaged, inflation rose, and economic stagnation occurred in Ghana. Zimbabwe has also suffered from the myths of African socialism under Mugabe’s rule. Mugabe collectivized the means of production in the late 1980s when he became Zimbabwe’s strongman. Rampant corruption, huge budget deficits, and mismanagement of resources have dragged the economy, hyperinflation, 60 percent unemployment, and a desperate shortage of hard currency. These examples clearly demonstrate how socialism had utterly stagnated the economies of these countries until a market economy was once again reinstated.

But the question remains as to why Africans deeply believed in socialism and embraced it in the 1960s. In Africa, socialism was presented as an anti-colonial and anti-imperialist ideology while capitalism was perceived as the ideology of the oppressor, the colonizer, and of profit. Africans strongly believe in socialism because they think that socialism is compatible with African culture since African culture is a collectivist culture. African culture values the group over the individual. It values the concept of sharing, solidarity, and altruism. Of course, all these moral virtues are well-intended, but they play no substantial role in the improvement of the living standard of people. What improves the living standard of people is the ability to retain private property, to voluntarily exchange with one another what we own in order to create capital. Some African countries in the post-colonial era resisted the socialist temptation; notably countries like Côte d’Ivoire, Kenya, and South Africa.

For example, in the 1960s and 1970s, Côte d’Ivoire was the most economically advanced country in West Africa. While its neighbors were embracing socialism, Côte d’Ivoire opted for a market economy. Despite having an authoritarian political regime, like all African countries during that time; the Ivorian people were, nonetheless, economically free. They had the freedom to create businesses, and to expand private property. From 1960 to 1979, the GDP in Côte d’Ivoire grew at 8.1 percent per year, which means that in real terms capita, it increased from $595 to $1,114. Cote d’Ivoire’s economic expansion during that period was called “The Ivorian Miracle” because the country was exporting agricultural goods to the neighboring countries have had a shortage of food production due to their socialistic policies. The Ivorian Miracle made Côte d’Ivoire the most prosperous nation in West Africa between 1960 and 1980.

What Africans have failed to grasp about capitalism and the free market is that, it is not a system intrinsic to Western culture. It is a system intrinsic to human nature regardless of race, ethnicity, or the local culture. Socialism has failed in Africa as it has failed in Eastern Europe, India, China and in South America. Even if Africa is culturally collectivist, it is important to comprehend that a group is a collectivity of individuals whereby each individual within the group is stimulated by the pursuit of his own interests. The pursuit of one’s self-interests is an intrinsic factor of human nature that no central authority can change regardless of the goal of the common good. Despite the collectivist nature of African culture, African culture is not exempted from that natural law of human nature. Coercing human nature to do something that is not in harmony with the nature of human understanding, will result in failure. That is why socialism, wherever it is tried, will always fail.

Currency Debasement and Social Collapse

Ludwig von Mises — Fri, 01 Nov 2019 14:00:00 -0500

Knowledge of the effects of government interference with market prices makes us comprehend the economic causes of a momentous historical event, the decline of ancient civilization.

It may be left undecided whether or not it is correct to call the economic organization of the Roman Empire capitalism. At any rate it is certain that the Roman Empire in the 2nd century, the age of the Antonines, the "good" emperors, had reached a high stage of the social division of labor and of interregional commerce. Several metropolitan centers, a considerable number of middle-sized towns, and many small towns were the seats of a refined civilization.

The inhabitants of these urban agglomerations were supplied with food and raw materials not only from the neighboring rural districts, but also from distant provinces. A part of these provisions flowed into the cities as revenue of their wealthy residents who owned landed property. But a considerable part was bought in exchange for the rural population's purchases of the products of the city dwellers' processing activities.

There was an extensive trade between the various regions of the vast empire. Not only in the processing industries, but also in agriculture there was a tendency toward further specialization. The various parts of the empire were no longer economically self-sufficient. They were interdependent.

What brought about the decline of the empire and the decay of its civilization was the disintegration of this economic interconnectedness, not the barbarian invasions. The alien aggressors merely took advantage of an opportunity which the internal weakness of the empire offered to them. From a military point of view the tribes which invaded the empire in the 4th and 5th centuries were not more formidable than the armies which the legions had easily defeated in earlier times. But the empire had changed. Its economic and social structure was already medieval.

The freedom that Rome granted to commerce and trade had always been restricted. With regard to the marketing of cereals and other vital necessities it was even more restricted than with regard to other commodities. It was deemed unfair and immoral to ask for grain, oil, and wine, the staples of these ages, more than the customary prices, and the municipal authorities were quick to check what they considered profiteering. Thus the evolution of an efficient wholesale trade in these commodities was prevented.

The policy of the annona, which was tantamount to a nationalization or municipalization of the grain trade, aimed at filling the gaps. But its effects were rather unsatisfactory. Grain was scarce in the urban agglomerations, and the agriculturists complained about the unremunerativeness of grain growing.1

The interference of the authorities upset the adjustment of supply to the rising demand.

The showdown came when in the political troubles of the 3rd and 4th centuries the emperors resorted to currency debasement. With the system of maximum prices, the practice of debasement completely paralyzed both the production and the marketing of the vital foodstuffs and disintegrated society's economic organization. The more eagerness the authorities displayed in enforcing the maximum prices, the more desperate became the conditions of the urban masses dependent on the purchase of food.

Commerce in grain and other necessities vanished altogether.

To avoid starving, people deserted the cities, settled on the countryside, and tried to grow grain, oil, wine, and other necessities for themselves. On the other hand, the owners of the big estates restricted their excess production of cereals and began to produce in their farmhouses — the villae — the products of handicraft which they needed. For their big-scale farming, which was already seriously jeopardized because of the inefficiency of slave labor, lost its rationality completely when the opportunity to sell at remunerative prices disappeared.

As the owner of the estate could no longer sell in the cities, he could no longer patronize the urban artisans either. He was forced to look for a substitute to meet his needs by employing handicraftsmen on his own account in his villa. He discontinued big-scale farming and became a landlord receiving rents from tenants or sharecroppers. These coloni were either freed slaves or urban proletarians who settled in the villages and turned to tilling the soil.

A tendency toward the establishment of autarky of each landlord's estate emerged. The economic function of the cities, of commerce, trade, and urban handicrafts, shrank. Italy and the provinces of the empire returned to a less advanced state of the social division of labor. The highly developed economic structure of ancient civilization retrograded to what is now known as the manorial organization of the Middle Ages.

The emperors were alarmed with that outcome, which undermined the financial and military power of their government. But their counteraction was futile as it did not affect the root of the evil. The compulsion and coercion to which they resorted could not reverse the trend toward social disintegration which, on the contrary, was caused precisely by too much compulsion and coercion.

No Roman was aware of the fact that the process was induced by the government's interference with prices and by currency debasement. It was vain for the emperors to promulgate laws against the city dweller who "relicta civitate rus habitare maluerit."2

The system of the leiturgia, the public services to be rendered by the wealthy citizens, only accelerated the retrogression of the division of labor. The laws concerning the special obligations of the shipowners, the navicularii, were no more successful in checking the decline of navigation than the laws concerning grain dealing in checking the shrinkage in the cities' supply of agricultural products.

The marvelous civilization of antiquity perished because it did not adjust its moral code and its legal system to the requirements of the market economy. A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police.

The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Führer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.

1. Cf. Rostovtzeff, The Social and Economic History of the Roman Empire (Oxford, 1926), p. 187.
2. Corpus Juris Civilis, 1. un. C. X. 37.

Six Graphs Showing Just How Much the Government Has Grown

Ryan McMaken — Fri, 01 Nov 2019 11:45:00 -0500

Federal spending and federal taxation in the United States set new records in 2019. And the federal budget deficit swelled to more than a trillion dollars. Europe is in the middle of an enormous spending binge. But apparently hard-core laissez-faire libertarian purists have taken over the world's governments.

At least, that's the case in the minds of many leftists and conservatives who have convinced themselves that "market fundamentalists" have conquered the world's institutions, and have enacted a global regime of near-zero taxation, free trade, and almost totally unregulated markets.

We hear this over an over again when everyone from The Pope to Bernie Sanders claims "neoliberalism" — a term used to "denote... a radical, far-reaching application of free-market economics unprecedented in speed, scope, or ambition" — has forged the world into a paradise for radical libertarians.

As one writer at The Guardian assures us, the UK must end the nation's "generation-long experiment in market fundamentalism." Meanwhile, Tucker Carlson insists that American policymakers "worship" markets and have a near-religious devotion to capitalism.

The neoliberal takeover is so complete, in fact, that we're told neoliberals are the ones really running the Labour Party. Meanwhile, sociologist Lawrence Busch informs us of a "neoliberal takeover" of higher education. "Free-market fundamentalists," Busch contends, have transformed America's colleges and universities into swamps of capitalist obeisance.

By What Metric?

But whenever I hear about how government intervention in the marketplace is withering away — to be replaced by untrammeled markets — I am forced to wonder what metric these people are using.

By what measure are governments getting smaller, weaker, and less involved in the daily lives of human beings?

In this country, at least, this case certainly can't be made by consulting the data on government taxation and spending.

From 1960 to 2018, federal tax receipts per capita increased from $3,523 to $5,973, an increase of 70 percent.

Combining state and local taxation with federal taxes, the increase is even larger. Taxation per capita at all levels combined grew 118 percent from $5,247 in 1960 to $11,461 in 2018.

The size and scope of government isn't just growing to reflect population changes. After all, the US population only grew 81 percent from 1960 to 2018. And the federal government, embroiled in a global cold war amidst a rising tide of social programs, wasn't exactly vanishingly small in 1960.

In all these per capita graphs, I've factored in population growth because many defenders of government growth claim that governments must get larger as populations increase. Even if that were true, we can see that total spending and taxation is outpacing population growth considerably.1 But it should not simply be accepted that population growth ought to bring increases in government spending and taxation. Military defense of the United States doesn't become more expensive simply because the population grew.2 Moreover, innovation and productivity gains make products and services less expensive in a functioning private economy. This is often masked by relentless money supply inflation in the name of price "stability." But the natural progression of an economy is toward falling prices. Only with government procurements have we come to expect everything getting more expensive every year.

Fueled by huge deficits, federal spending has outpaced tax collections. Per capita federal spending increased by 191 percent from 1960 to 2018, climbing from $4,300 to $12,545.

The deficit topped a trillion dollars during the 2019 fiscal year, a new high for a so-called "boom period" during which deficits are supposed to shrink.

Ultimately, of course, huge deficits will put an additional burden on the taxpayers beyond the hundreds of billions of dollars per year necessary to simply pay interest on the debt. The huge debt levels put upward pressure on interest rates, and require more central-bank interventions designed to prop up demand for government debt. These interventions both crowd out demand for private debt, and have led to asset-price inflation as a result of money-supply inflation. This benefits the wealthy, but harms first time home buyers and ordinary savers.

The government spending itself is a problem as well. Governments try to play off government spending as if it were all a free gift to the taxpayers as some sort of "return" on the "investment" of taxes paid.

As Murray Rothbard has noted, however, government spending is just as damaging as the taxation that came before it. Government procurements bid up the prices of goods and services that could have been available at lower prices in the private sector were it not for the government spending. Steel and other materials would be less expensive for entrepreneurs. High tech workers could be employed innovating and making things for ordinary taxpayers instead of for government agencies and bureaucrats. Small business owners and ordinary consumers all are worse off as a result.

So, given that spending and taxation are at or are near all-time highs right now, where exactly is this takeover by laissez-faire libertarians we keep hearing about?

It's certainly not in the regulatory side of the government.

The number of pages published in the Code of Federal Regulations increased 710 percent from 1960 to 2018, and 37 percent over the past twenty years. Every additional page represents new regulations, new rules, new punishments, and new fees. These are costs employers must contend with, and consumers must ultimately pay for. Protectionists who think that manufacturers would flock to the United States were it not not low tariffs might consider the regulatory burden placed on employers by our own domestic policies.

Both staffing and budgets for federal regulatory agencies continue to balloon. The combined budgets for federal regulatory agencies have more than tripled over the past 40 years, rising from under 20 billion in 1978 to 65 billion today.

Part of this has been to pay salaries for the ever growing army of federal employees. Employees at regulatory agencies doubled over the past forty years, rising from 140,000 full-time equivalent positions in 1978 to 280,000 today.

The US population increased by 47 percent during that time.

When the federal government isn't spending more, it's taking on more risk, committing the taxpayers to more bailouts, and flooding the market with government insured debt. As The Washington Post reported earlier this month, "In 2019, there is more government-backed housing debt than at any other point in U.S. history." And these government guarantees are up considerably since the 2009 housing crash. The Post continues: "Now, Fannie Mae, Freddie Mac and the Federal Housing Administration guarantee almost $7 trillion in mortgage-related debt, 33% more than before the housing crisis ... Because these entities are run or backstopped by the U.S. government, a large increase in loan defaults could cost taxpayers hundreds of billions of dollars."

Yet, in spite of all this, we'll no doubt continue to be told that government is withering away, government institutions are "underfunded," and extreme anti-government libertarians have taken over. Of course, it's entirely possible that the success of certain free-market ideas — however limited that success may be — has helped to restrain the growth of government taxation and spending. Without this so-called "victory" of the libertarians, we might be looking at per capita tax collections that grew 200 or 300 percent in recent decades, rather than a "mere" 118 percent.

But given the ongoing growth of government taxation, spending, and regulation, it should be abundantly clear that we are hardly living in an age of "market fundamentalism," laissez-faire libertarianism, or policymakers who "worship" the market. If anything, trends appear to be moving in exactly the opposite direction.

1. One factor in rising tax collections during the twentieth century was the increase in the number of women who became wage earners. Wages, of course, are taxable, while in-kind or cottage-type income earned in household work is generally not taxable. As women left the home, they were more easily taxed. This trend, however, peaked in the 1990s, and the proportion of the workforce that is women now is about equal to what it was in the early 1990s. Per capita tax collections have continued to increase since the 1990s nonetheless.
2. Nor should we assume that just because the overall economy grows, that government growth ought to keep up. Nor do the tools provided by government agencies give us much help in discerning such a relationship. For example, since government spending is included within GDP measures, government spending growth is not independent from GDP growth. We encounter a similar problem comparing government consumption and private consumption. In an economy with a sizable welfare state and with a lot of government contracting in the private sector, we find private consumption can be driven by government spending, and is not independent. For example, people who spend their welfare/soc. security checks on a vacation are increasing "private" consumption, but it's not really private in any true sense. Moreover, a worker who builds roads for government agencies is essentially a government employee, although his job and his spending would be counted as "private." The same, of course, is true of an engineer who builds high tech gadgets for the Pentagon. His paycheck isn't really private, and his subsequent spending isn't really private in the broad sense.

The Power of Self-Ownership

David Gordon — Fri, 01 Nov 2019 07:00:00 -0500

As every reader of Murray Rothbard knows, the principle of self-ownership stands at the basis of libertarian thought. Each person is the owner of his or her own body. If we add a principle for homesteading land and natural resources, we can without much trouble get to an anarcho-capitalist society. But even on its own, the self-ownership principle rules out the welfare state. You cannot be compelled to labor for someone else, even if the other person "needs" your labor more than you do.

You would expect Marxists to brush aside self-ownership as bourgeois apologetics, and for most part they do. G.A. Cohen, a Marxist who taught political theory at Oxford University, was an exception. In his book Self-Ownership, Freedom, and Equality (Cambridge University Press, 1995), he says that he finds self-ownership intuitively plausible:

In my experience, leftists who disparage [Robert] Nozick's essentially unargued affirmation of each person's right over himself lose confidence in their unqualified denial of the thesis of self-ownership when they are asked to consider who has the right to decide what should happen, for example, to their own eyes. They do not immediately agree that, were eye transplants easy to achieve, it would then be acceptable for the state to conscript potential eye donors into a lottery whose losers must yield an eye to beneficiaries who would otherwise not be one-eyed but blind." (p. 70)

As Cohen rightly notes, your right to your own body outweighs commonly used socialist principles that mandate redistribution. You are entitled to keep your eyes even if the fact that you have two working eyes is a matter of genetic luck and even if a blind person "needs" an eye more than you do. (You could still see with one eye but he cannot see at all.)

Cohen must now confront a dilemma. He finds self-ownership prima facie plausible. But self-ownership rules out the welfare state, and even worse, is a big step toward a fully free market society. What can he do to escape the dilemma?

Two courses of action suggest themselves. He might admit self-ownership, but deny that it leads to free-market capitalism. Alternatively, he might claim that, in spite of its surface plausibility, self-ownership ought to be rejected. It is the latter tactic that he adopts. He readily acknowledges that self-ownership rules out the welfare state.

Cohen says that the force of self-ownership really derives from something else. We have a strong belief that it is wrong to interfere with the integrity of someone’s body, and this, he thinks, is different from self-ownership. He asks us to imagine that everyone is born with empty eye sockets. The state implants two eyes in everyone at birth, using an eye bank it owns. If someone lost both eyes, wouldn’t we oppose an eye lottery to remove forcibly one eye from a sighted person to help the blind person? But in the example the state owns all the eyes. Cohen concludes that our real objection to an eye lottery in the actual world is not that it violates self-ownership but that people have a right to bodily integrity.

The "suggestion arises that our resistance to a lottery for natural eyes shows not belief in self-ownership but hostility to severe interference in someone’s life. For the state need never vest ownership of the eyes in persons." (p. 244)

A defender of self-ownership can readily acknowledge that it would be wrong to remove someone's eyes in Cohen's science-fiction case. All he needs to preserve his principle is the fact that you own your eyes adds to the moral badness of making you enter the eye lottery. Bodily integrity and self-ownership supplement each other: they do not compete for our allegiance, as Cohen seems to think. The fact that Cohen had to resort to a bizarre example to try to escape self-ownership shows its power. Once you think about it, self-ownership is hard to reject.